Question

Harker Company manufactures automobile components for the worldwide market. The company has three large production facilities in Virginia, New Jersey, and California, which have been operating for many years. Brett Harker, vice president of production, believes it is time to upgrade operations by implementing computer-integrated manufacturing (CIM) at one of the plants.

Brett has asked corporate controller Connie Carson to gather information about the costs and benefits of implementing CIM. Carson has gathered the following data:

Initial equipment cost		$	6,000,000
Working capital required at start-up		$	500,000
Salvage value of existing equipment		$	75,000
Annual operating cost savings		$	900,000
Salvage value of new equipment at end of its useful life		$	100,000
Working capital released at end of its useful life		$	500,000
Useful life of equipment			10 years

Harker Company uses a 12% discount rate. The net present value Chester’s is $(1,146,620) & internal rate of return is 7.64%.

(c)

Do you recommend that the company proceed with the purchase and implementation of CIM? Why or why not?

Answer 1

Solution c:

We will not recommend that the company proceed with the purchase and implementation of CIM because NPV for this project is negative and internal rate of return is lesser than required rate of return.