Bramble Company manufactures automobile components for the worldwide market. The

Question

Bramble 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:

Bramble Company uses a 12% discount rate.

a. Use Excel or a similar spreadsheet application to calculate the internal rate of return on Bramble’s proposed investment.

b. Andrew Burr, manager of the Virginia plant, has been looking over Carson’s information and believes she has missed some important benefits of implementing CIM. Burr believes that implementing CIM will reduce scrap and rework costs by $160,800 per year. The CIM equipment will take up less floor space in the factory than the old equipment, freeing up 6,000 square feet of space for a planned new research facility. Initial plans called for renting additional space for the new facility, at a cost of $21.44 per square foot. Calculate a revised net present value and internal rate of return using this additional information. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 58,971. Round internal rate of return to 2 decimal places, e.g. 15.25%.)

Initial equipment cost $ 6,432,000 Working capital required at start-up $ 643,200 Salvage value of existing equipment $ 80,400 Annual operating cost savings $ 900,480 Salvage value of new equipment at end of its useful life $ 214,400 Working capital released at end of its useful life $ 643,200 Useful life of equipment 10 years

Explanation / Answer

b.

Working:

Years 0 1 2 3 4 5 6 7 8 9 10 10th year Initial investment -6432000 Initial working capital -643200 Salvage value of the existing plant 80400 Savings in annual operating costs 900480 900480 900480 900480 900480 900480 900480 900480 900480 900480 Salvage value of the new equipment 214400 Release of working capital 643200 Total Cash Flow -6994800 900480 900480 900480 900480 900480 900480 900480 900480 900480 900480 857600 Internal rate of return 6%

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