The company is considering the acquisition of equipment that would radically change its manufacturing process.
- The equipment would cost $3,500,000
- The equipment's useful life is projected to be seven years, and 30 per cent diminishing value depreciation would be used for tax purposes.
- The equipment requires software that will be developed over the first three years. However, the equipment would be fully functional from the beginning of the second year. Each software expenditure, which would amount to $75,000 per year, will be expensed during the year it is incurred.
- A computer systems operator would be hired immediately to oversee the operation of the new equipment. The operator's annual salary would be $86,000, plus on-costs of 40 per cent.
- Maintenance technicians would be needed. The total cost of their wages and on- costs would be $125,000 per year.
- The changeover of the manufacturing line would cost $180,000, to be fully expensed in the first year.
- Several of the company's employees would need retraining to operate the new equipment. The training costs are projected as follows:
First Year $35,000
Second Year $25,000
Third Year $10,000
- An inventory of spare parts for the robotic equipment would be purchased immediately at a cost of $60,000. This investment in working capital would be maintained throughout the life of the equipment. At the end the parts would be sold for $60,000.
- The equipment's salvage value is projected to be $75,000. It would be fully depreciated at that time.
- Apart from the costs specifically mentioned above, management expects that the equipment would save $1,200,000 per year in manufacturing costs.
- Switching to the equipment would enable the company to sell some of its manufacturing machinery over the next two years. The following sales schedule is projected:
Calculate the Net Present Value and Internal Rate of Return.