Discuss importance of assessing effect of intangible benefit

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Reference no: EM13939287

QUALITY, MARKET SHARE, AUTOMATED MANUFACTURING ENVIRONMENT

A company is considering two competing investments. The first is for a standard piece of production equipment; the second is for computer-aided manufacturing (CAM) equipment. The investment and after-tax operating cash flows follow:

Year	Standard Equipment	CAM Equipment
0	$(500,000)	$(2,000,000)
1	300,000	100,000
2	200,000	200,000
3	100,000	300,000
4	100,000	400,000
5	100,000	400,000
6	100,000	400,000
7	100,000	500,000
8	100,000	1,000,000
9	100,000	1,000,000
10	100,000	1,000,000

Assume that the company's cost of capital is 14 percent.

Required:

1. Calculate the NPV of each alternative by using the 14 percent rate.

2. Now assume that if the standard equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did automate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50 percent for years 3 through 10. Recalculate the NPV of the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangible benefits.

Reference no: EM13939287

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