Gemini is considering purchasing robotic assembly line to replace its existing labor-intensive equipment. The new equipment is
Question:
Gemini is considering purchasing robotic assembly line to replace its existing labor-intensive equipment.
The new equipment is more efficient and is expected to reduce annual operating costs by $250,000 for the first year, and $425,000 per year for each of the next four years. The acquisition cost of the robotic equipment is $1,500,000. The company uses the straight-line method of deprecation. The new equipment has an expected useful life of 5 years, after which the expected salvage value is zero.
The existing equipment has a net book value of $200,000, a remaining useful life of 5 years, and a zero salvage value at that time. If the equipment is sold today, management believes they would receive $200,000.
Management determined that the required rate of return for projects of this risk is 12% (minimum accounting return is also 12%) and that the maximum payback period is 3 years. Assume a tax rate of 40%.
Analyze the project using each of the following quantitative approaches: net present value, payback period, accrual accounting rate of return, discounted payback period, and internal rate of return.
Based solely on quantitative factors, should Gemini undertake this project? Why or why not?
What qualitative factors should Gemini consider in making this decision?
Gemini is looking to make a $125,000 investment in a motor. The motor has a 5 year expected life and no terminal disposal value. Management believes the new motor will yield $35,000 in annual savings in cash operating costs. Gemini’s required rate of return is 10% and their tax rate is 30%.
Determine the net present value, payback period, discounted payback period, and internal rate of return for this investment.
Should Gemini make this investment? Why or why not