Question: Postaudit, Sensitivity Analysis Newmarge Products Inc. is evaluating a new design for one of its manufacturing processes. The new design will eliminate the production of a toxic solid residue. The initial cost of the system is estimated at $860,000 and includes computerized equipment, software, and installation. There is no expected salvage value. The new system has a useful life of eight years and is projected to produce cash operating savings of $225,000 per year over the old system (reducing labor costs and costs of processing and disposing of toxic waste). The cost of capital is 16 percent.
Required: 1. Compute the NPV of the new system.
2. One year after implementation, the internal audit staff noted the following about the new system: (1) the cost of acquiring the system was $60,000 more than expected due to higher installation costs, and (2) the annual cost savings were $20,000 less than expected because more labor cost was needed than anticipated. Using the changes in expected costs and bene- fits, compute the NPV as if this information had been available one year ago. Did the company make the right decision?
3. Conceptual Connection: Upon reporting the results mentioned in the postaudit, the marketing manager responded in a memo to the internal auditing department indicating that revenues had increased by $60,000 per year because of increased purchases by environmentally sensitive customers. Describe the effect that this has on the analysis in Requirement 2.
4. Conceptual Connection: Why is a postaudit beneficial to a firm?