Based on the following:
- The estimated purchase price for the equipment required to movethe operation in-house would be $500,000. Additional net workingcapital to support production (in the form of cash used inInventory, AR net of AP) would be needed in the amount of $25,000per year starting in year 0 and through all 5 years of the projectto support production.
- The current spending on this component (i.e. annual spend pool)is $875,000. The estimated cash flow savings of bringing theprocess in-house is 20% or annual savings of $175,000. Thisincludes the additional labor and overhead costs required.
- Your company has access to a credit line and could borrow thefunds at a rate of 6%.
- Finally, the equipment required is anticipated to have asomewhat short useful life, as a new wave of technology is on thehorizon. Therefore, it is anticipated that the equipment will besold after five years for $25,000. (i.e. the terminal value).
Your colleague from Accounting, recommends using the baseassumptions above: 5-year project life, flat annual savings, and10% discount rate. She does not feel the equipment will have anyterminal value due to advancements in technology.
Using the data presented above (and ignoring the extraneousinformation), for this profit and supply chain improvement project,calculate each of the following (where applicable): ShowCalculations
o Nominal Payback
o Discounted Payback
o Net Present Value
o Internal Rate of Return
