Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 20

Quality, Market Share, Automated Manufacturing Environment
Fabre Company, Patterson Company's competitor, is considering the same investments as Patterson. Refer to the data in Problem 14-47 above. Assume that Fabre's cost of capital is 14%.
Required:
1. Calculate the NPV of each alternative by using the 14% rate.
2. CONCEPTUAL CONNECTION Now assume that if the standard equipment is purchased, the competitive position of the firm will deteriorate because of lower quality (relative to competitors who did automate). Marketing estimates that the loss in market share will decrease the projected net cash inflows by 50% for Years 3 through 10. Recalculate the NPV of the standard equipment given this outcome. What is the decision now? Discuss the importance of assessing the effect of intangible benefits.