Saxon Products, Inc., is investigating the purchase of a robot for use on the company's assembly line. Selected data relating to the robot are provided below:

Cost of the robot ..................................................................... $1,600,000

Installation and software .......................................................... $450,000

Annual savings in inventory carrying costs ............................ $210,000

Annual increase in power and maintenance costs ................. $30,000

Salvage value in 5 years ............................................................. $70,000

Useful life ....................................................................................... 5 years

In addition to the data above, engineering studies suggest that use of the robot will result in a savings of 25,000 direct labor-hours each year. The labor rate is $16 per hour. Also, the smoother work flow made possible by the use of automation will allow the company to reduce the amount of inventory on hand by $400,000. This inventory reduction will take place at the end of the first year of operation; the released funds will be available for use elsewhere in the company. Saxon Products has a 20% required rate of return.

Required:

1. Determine the annual net cost savings if the robot is purchased. (Do not include the $400,000 inventory reduction or the Salvage value in this computation.)

2. Compute the net present value of the proposed investment in the robot. Based on these data, would you recommend that the robot be purchased? Explain.

3. Assume that the robot is purchased. However, due to unforeseen problems, software and installation costs were $75,000 more than estimated and direct labor could only be reduced by 22,500 hours per year, rather than the original estimate of 25,000 hours. Assuming that all other cost data is accurate, what would a post audit suggest is the actual net present value of this investment? Does it appear that the company made a wise investment?

4. Upon seeing your analysis in (3) above, Saxon's president stated, "That robot is the worst investment we've ever made. And now we'll be stuck with it for years."

a. Explain to the president what benefits other than cost savings might accrue from using the new automated equipment.

b. Compute for the president the minimum dollar amount of annual cash inflow that would be needed from the benefits in (a) above for the automated equipment to yield a 20% rate of return.