4 Relevant cash flows Present-value discount factors at 14% Total present value 1 Initial investment in CIM today 2a Current disposal price of old production line 2b Current recovery of working capital (€6 − €2) 3a Recurring operating cash savings €4 each year for 5 years 3b Recurring cash flows from additional revenues of €3 each year for 5 years 4a Higher terminal disposal price of machines (€20 − €4) in year 5 4b Reduced recovery of working capital (€2 − €6) in year 5 Net present value of CIM investment €(45) 5 4 4 3 16 (4) 1.000 1.000 1.000 3.433 3.433 0.519 0.519 €(45.000) 5.000 4.000 13.732 10.299 8.304 (2.076) €(5.741) The use of too short a time horizon such as 5 years biases against the adoption of CIM projects. Before finally deciding against CIM in this case, Manuel should consider other factors, including a Sensitivity to different estimates of recurring cash savings or revenue gains. b Accuracy of the costs of implementing and maintaining CIM. c Benefits of greater flexibility that results from CIM and the opportunity to train workers for the manufacturing environment of the future. d Potential obsolescence of the CIM equipment. Dinamica should consider how difficult the CIM equipment would be to modify if there is a major change in CIM technology. e Alternative approaches to achieve the major benefits of CIM such as changes in processor implementation of just-in-time systems. f Strategic factors. CIM maybe the best approach to remain competitive against other low-cost producers in the future.
