Fabre Company, Patterson Company€™s competitor, is considering the same investments as Patterson. Refer to the data above. Assume that Fabre€™s cost of capital is 14 percent.

Required:
1. Calculate the NPV of each alternative by using the 14 percent rate.
2. Now assume that if the standard equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did automate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50 percent for years 3 through 10. Recalculate the NPV of the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangible benefits.

Transcribed Image Text:

Year Standard Equipment CAM Equipment $(500,000) 300,000 200,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 $(2,000,000 100,000 200,000 300,000 400,000 400,000 400,000 500,000 1,000,000 1,000,000 1,000,000 10