Glentech Manufacturing is considering the purchases of an automated parts…
Glentech Manufacturing is considering the purchases of an automated parts handler for theassembly and test area of its Phoenix, Arizona, plant. The handler will costs $250,000 topurchase plus $10,000 for installation and employee training. If the company undertakes theinvestment, it will automate a part of the semiconductor test area and reduce operatingcosts by $70,000 per year for the next 10 years. However, five years into the investment’slife, Glentech will have to spend an additional $100,000 to update and refurbish the handler.The investment in the handler will be depreciated using straight-line depreciation over 10-years, and the refurbishing costs willbe depreciated over the remaining five-year life of thehandler (also using straight-line depreciation). In 10 years, the handler is expected to beworth $5,000 although its book value will be zero. Glentech’s tax rate is 30%, and itsopportunity cost of capital is 12%.
- a)Is the project good for Glentech? Why or why not?
- b)What can we tell about the project from the NPV profile?
- c)If the project were partially financed by borrowing, how would this affect the investment cash flows? How would borrowing a portion of the investment outlay affect the value of the investment to the firm?
- d)The project calls for two investments: one immediately and one at the end of Year 5. How much would Glentech earn on its investment, and how should we account for the additional investment outlay in our calculations?
- e)What are the considerations that make this investment somewhat risky, and how would you investigate the potential risks of this investment?