Glentech Manufacturing is considering the purchase of an automated parts handler for the assembly and test area of its Phoenix, Arizona, plant. The handler will cost $250,000 to purchase plus $10,000 for installation and employee training. If the company undertakes the investment, it will automate a part of the semiconductor test area and reduce operating costs by $70,000 per year for the next 10 years. However, ?ve years into the investment's life, Glentech will have to spend an additional $100,000 to update and refurbish the handler. The investment in the handler will be depreciated using straight-line depreciation over 10 years, and the refurbishing costs will be depreciated over the remaining ?ve-year life of the handler (also using straight-line depreciation). In 10 years, the handler is expected to be worth $5,000, although its book value will be zero.Glentech's tax rate is 30%, and its opportunity cost of capital is 12%. Exhibit P2-8.1contains cash ?ow calculations for the project that can be used in performing a DCF evaluation of its contribution to ?rm value. Answer each of the fol-lowing questions concerning the project:
a. is this a good project for Glentech? Why or why not?
b. What can we tell about the project from the NPV pro?le found in Exhibit P2-8.1?
c. If the project were partially ?nanced by borrowing, how would this affect the investment cash ?ows? How would borrowing a portion of the investment outlay affect the value of the investment to the ?rm?
d. The project calls for two investments: one immediately and one at the end of Year 5. How much would Glentech earn on its investment, and how should we account for the additional investment outlay in our calculations?
e. What are the considerations that make this investment somewhat risky, and how would you investigate the potential risks of this investment?