PROBLEM $13-30$ Net Present Value Analysis; Uncertain Future Cash Flows; Postaudit LO$13-2,$ LO$13-4$

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

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$

Usefullife

$5$ 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:

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.$)$

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.

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 postaudit suggest is the actual net present value of this investment? Does it appear that the company made a wise investment?