Today Production Company Is Considering the Purchase of a Flexible

question 109

Essay

Today Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings associated with the system are as follows: $$\begin{array} { l c } \text { Decreased waste } & \$ 150,000 \\\text { Increased quality } & 200,000 \\\text { Decrease in operating costs } & 125,000 \\\text { Increase in on-time deliveries } & 25,000\end{array}$$ The system will cost $1,500,000 and will last 10 years. The company's cost of capital is 10%.
Required:
A. Calculate the payback period for the flexible manufacturing system.
B. Calculate the NPV for the flexible manufacturing system.

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Definitions:

Purchasing Power

How much goods or services can be bought with one unit of money, indicating the currency's value.

Real Interest Rates

This is the interest rate after inflation adjustment, demonstrating the true cost of loans or the actual gains from savings accounts.

Nominal Interest Rates

The interest rates before adjustments for inflation, indicating the gross return on financial investments or loans.

Inflation

The rate of increase in the general price index for goods and services, leading to a decrease in how much can be bought.