A company is considering two competing investments. The first is for a standard piece of production equipment; the second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows follow:

Assume that the company€™s cost of capital is 14 percent.

Required:
1. Calculate the NPVof 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 NPVof the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangiblebenefits.

Transcribed Image Text:

Year Standard Equipment $(500,000) 300,000 200,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 CAM Equipment $(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 4 10