Solution to BCQ 10 – Capital Budgeting ProblemYou are a consultant to New Texas Power and Electric. They are trying to decide which, if any, type of robot they should purchase to repair welds in nuclear reactors. There are two types of robots under consideration: The “Smart” robot whose actions in the reactor are controlled by what it sees. The initial investment is $300,000. A different kind of robot, whose action in the reactor is controlled by a (external) human operator. The initial investment is $200,000.Both robots have an expected life of five years, and no salvage value at the end of that time. A human welder currently repairs Welds. The job is hazardous, so the welder’s annual pay and fringe benefits total $150,000.Buying either robot eliminates the need for the human welder. The operator-controlled robot requires an operator whose annual salary (and benefits) would be $50,000. The “Smart” robot requires an extra $15,000annually for technical support. New Texas Power and Electric uses a discount rate of 18% for projects with this kind of risk. Their marginal taxrate is 50%. They will use straight-line deprecation. Complete the table, then explain what/why you would recommend to New Texas Power & Electric. Alternative NPV IRR PaybackSmart RobotOperator ControlledRobotSee next page for solutionBased only on the financial information, one would choose the operator controlled robots. While both projects meet selection criteria (positive NPV, IRR > investment hurdle threshold), they are mutually exclusive. You can only pick one. The operator controlled robots fair better by all three criteria (higher NPV, higher IRR, and quicker payback). While asked for in this problem, in the real world, one should address risk and the non-financial aspects of the decision. It would not take a great change in some of the savings estimates to make either of these projects seem unfavorable. Therefore, the decision has risk Some of the non-financial aspects to consider Reliability of the systems should be considered seriously. The amount of training can be an important factor The interests and feeling of the labor force should be recognizedClick here to see calculationsAlternatives Net Present Value IRR PaybackSmart robots $4,889 18.7% 3+ yearsOperator controlled robots$18,902 22.2% Just under 3
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