A Robot Development Project and Its Evaluation
Higgins Corporation (HC), a Detroit-based robot-manufacturing company, has developed a new robot called Helpmate, which incorporates advanced technology, such as vision systems, tactile sensing, and voice recognition. These features allow the robot to roam the corridors of a hospital or office building without following a predetermined track or bumping into objects. HC’s marketing department plans to target sales of the robot toward major hospitals. The robots will ease nurses’ workloads by performing low-level duties, such as delivering medications and meals to patients.
- The firm would need a new plant to manufacture the Helpmates; this plant could be built and made ready for production in two years. It would require a 30-acre site, which can be purchased for $1.5 million in year 0. Building construction would begin early in year 1 and continue throughout year 2. The building would cost an estimated $10 million, with a $4 million payment due to the contractor at the end of year 1, and with another $6 million payable at the end of year 2.
- The necessary manufacturing equipment would be installed late in year 2 and would be paid for at the end of year 2. The equipment would cost $13 million, including transportation and installation. When the project terminates, the land is expected to have an after-tax market value of $2 million, the building an after-tax value of $3 million, and the equipment an after-tax value of $3 million.
For capital budgeting purposes, assume that the cash flows occur at the end of each year. Because the plant would begin operations at the beginning of year 3, the first operating cash flows would occur at the end of year 3. The Helpmate plant’s estimated economic life is six years after completion, with the following expected after-tax operating cash flows in millions given in Table 5.4.
Table 5.4 Projected Cash Flows Associated with the Helpmates Project
| 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Calendar Year |
| 8 | 7 | 6 | 5 | 4 | 3 | 2 | 1 | 0 | End of Year |
| After-tax cash flows | |||||||||
| $8 | $14 | $18 | $13 | $8 | $6 | A. Operating revenue | |||
| B. Investment | |||||||||
| +2 | -$1.5 | Land | |||||||
| +3 | -$6 | -$4 | Building | ||||||
| +3 | -13 | Equipment | |||||||
| $16 | $14 | $18 | $13 | $8 | $6 | -$19 | -$4 | -$1.5 | Net cash flow |
Compute the equivalent worth of this investment at the start of operations. Assume that HC’s MARR is 15%.
