34. Video Solution Bailey, Inc., is considering buying a new gang punch that wou

Question

34. Video Solution Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $2,000 using the gang punch, but annual raw material costs would decrease $12,000. MARR is 5 percent/year. a. What is the future worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on future worth? c. Should Bailey buy the gang punch?

Explanation / Answer

Annual Savings = Saving in Annual raw material cost - Extra Annual labour cost

Annual Savings = $12,000 - $2,000 = $10,000

a.)

PV of future savings = PV(0.05,15,-10000) = $103,796.58

NPV = PV of future savings - Initial Investment = $3,796.58

b.)

If the PV of future cashflows is higher than the intial cost of investment then it is good to invest.

c.)

Yes, they should buy gang punch as NPV is greater than 0.

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