Reference no: EM132581839

Trimming the Fat to Boost Profitability

To reduce production costs, Automaton's COO, Christine Brady, suggests replacing one of its manufacturing equipment with a newer, more efficient model. This four-year project will result in reduced manufacturing costs which, in turn, would allow Automation to reduce the price of its flagship AI CalcPro IV. Christine believes reducing the cost of the processor will better position Automation to compete with AI-CHIP.

The current equipment, a MAC-98, can be sold today for $1,000,000 net. A brand-new MAC-100 retails for almost $3,250,000; however, Christine believes she can purchase it for $3,000,000 today. She will fund this purchase in part with proceeds from the sale of the MAC-98. In addition, accounts payable are expected to increase by $1,500,000 today, and fully reverse in year 4.

Question 1. What is the initial cash outlay for this project (i.e., year 0 cash flows)?

will it be (3,500,000=-3,000,000 + 1,000,000 - 1,500,000)

OR (500,000= -3,000,000+1,000,000 + 1,500,000))?? Please submit the answer with reasoning.