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. If the company undertakes the investment, it will automate part of the semiconductor test area and reduce operating costs by $ 70,000 per year for the next ten years. Five years into the life of the investment, however, Glentech will have to spend an additional $ 100,000 to up-date and refurbish the handler. The investment in the handler will be depreciated using straight-line depreciation over ten years, and the ­refurbishing costs will be depreciated over the remaining five-year life of the handler (also using straight-line depreciation). In ten 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 P2-10.1 contains cash flow calculations for the project that can be used in performing a DCF evaluation of its contribution to firm value. Answer each of the following questions concerning the project:
a. Is this a good project for Glentech? Explain your answer.
b. What can you tell about the project from the NPV profile found in Exhibit P2-10.1?
c. If the project were partially financed by borrowing, how would this affect the investment cash flows? How would borrowing a portion of the investment outlay affect the value of the investment to the firm?
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? How should you account for the additional investment outlay in your calculations?
e. What are the considerations that make this investment somewhat risky? How would you investigate the potential risks of this investment?

  • CreatedNovember 13, 2015
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