Pritchard Manufactured Products is considering investing in a flexible manufacturing system that will enable the company to respond rapidly to customer requests. Ben Jarvis, the controller of Pritchard, has estimated that the system will have a 1 0-year life and a net present value of negative $600,000. However, he admits that he did not take into account the potential sales increases that will result from improvement in on- time delivery. According to Ben, M this is just too hard to estimate.
Required:
Using a 10-year life and a required retum of 14 percent, what must be the annual value of the soft benefits associated with the project to yield a zero net present value? Assume that there is general agreement that the annual soft benefits will yield at least $120,000 in additional net cash flows. In this case, should the investment be undertaken?