Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design

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Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at $860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of eight years and is projected to produce cash operating savings of $225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16 percent.

Required:
1. Compute the NPVof the new system.
2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was $60,000 more than expected due to higher installation costs, and (2) the annual cost savings were $20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and benefits, compute the NPV as if this information had been available one year ago. Did the company make the right decision?
3. Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal auditing department indicating that revenues had increased by $60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2.
4. Why is a postaudit beneficial to a firm?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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