Westside Warehouse is considering reengineering some production operations with automated equipment. The new equipment would have an

Question:

Westside Warehouse is considering reengineering some production operations with automated equipment. The new equipment would have an initial cost of $5,000,000 including installation. The vendor has indicated that the equipment has an expected life of 7 years with an estimated salvage value of $400,000. Estimates of annual labor savings and incremental costs associated with operating the new equipment follow.

Annual labor cost savings (14 workers) .........$950,000

Annual maintenance costs ............. 40,000

Annual property taxes ................ 28,000

Annual insurance costs ............... 44,000

a. Assuming the company’s cost of capital is 6 percent compute the NPV of the investment in the automated equipment. (Ignore taxes.)

b. Based on the NPV, should the company invest in the new equipment?

c. Compute the profitability index for this potential investment. (Ignore taxes.)

d. Assume that of the estimates its management has made, Westside’s managers are least confident of the labor cost savings. Calculate the minimum annual labor savings that must be realized for the project to be financially acceptable.

e. What other qualitative factors should the company consider in evaluating this investment?

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...