An automotive parts plant is scheduled to be closed in 10 years. Nevertheless, its engineering department thinks that some investments in computer-controlled equipment can be justified by the savings in labour and energy costs within that time frame. The engineering department is proposing the following four-phase capital investment program:
The four phases are independent of one another. In other words, a decision not to proceed with an earlier phase does not affect the forecast savings from a later phase. The savings from any later phase are in addition to savings from earlier phases. There will be no significant residual value from any of the proposed investments. The firm’s cost of capital is 8%. As the plant’s financial analyst, what phases, if any, of the proposal would you accept?
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