The manager of Abu Dhabi Inc. is thinking of combining a new robot system with the current automated system. The following data related to the new system:
1-The cost of purchasing and installing the new system amount of $10,000,000
2-The system requires keeping a working capital (inventories of spare parts) $500,000
3-The cost of the system will be obtained through a 6-year 5% loan from Abu Dhabi National Bank. The loan and its interest will be paid in 6 annual installments.
4-The useful life of the new system is 20 years and will be sold then for $300,000
5-The annual sales from operating the new system is expected to be 10,000 units in the first 10 years and by 35,000 units in the last 10 years. The selling price is constant at $300 per unit.
6-Cost of goods sold is constant at $200 per unit
7-Annual operating expenses related to the new system:
Selling expenses
$400,000
Administrative expenses
$150,000
Depreciation expenses
$485,000
Other expenses
$ 50,000
If required rate of return is 12% and NPV model is used, should this project be accepted? Why?