Square Manufacturing is considering investing in a robotics manufacturing line.

Question

Square Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $9 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $6 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Square's controller has concluded that the operation will most probably result in annual savings of S4.2 million per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as S1.8 million per year for each of years 4 through 7. The company uses a 14 percent discount rate. Required: Compute the NPV under the three scenarios. (Negative amount should be indicated by a minus sign. Round present value factor for each year to three decimal places. Do not round other intermediate computations and round your final answer to the nearest dollar amount. Enter your answers in thousands of dollars and not in millions of dollars.)

Explanation / Answer

Answer: Formula: (-Initial Cost)+((Savings) x [(PV i=14%,n=4)+(PV i=16%,n=5)+(PV i=16%, n=6)+(PV i=14%,n=7)])

With that, we just input what they gave us.

Best: ($-9,000)+($6,000 x (0.592+0.519+0.456+0.3996)) = $2799.6
Expected: ($-9,000)+($4,200 x (0.592+0.519+0.456+0.3996)) = -$740.28
Worst: ($-9,000)+($1,800 x (0.592+0.519+0.456+0.3996)) = -$5460.12

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