Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher

Exercise 12

Sensitivity Analysis in Capital Investment Decisions
Square Manufacturing is considering investing in a robotics manufacturing line. Installation of the line will cost an estimated $3 million. This amount must be paid immediately even though construction will take three years to complete (years 0, 1, and 2). Year 3 will be spent testing the production line and, hence, it will not yield any positive cash flows. If the operation is very successful, the company can expect after-tax cash savings of $2 million per year in each of years 4 through 7. After reviewing the use of these systems with the management of other companies, Square's controller has concluded that the operation will most probably result in annual savings of $1,400,000 per year for each of years 4 through 7. However, it is entirely possible that the savings could be as low as $600,000 per year for each of years 4 through 7. The company uses a 16 percent discount rate.
Required
Compute the NPV under the three scenarios.