Tiger Computers, Inc., of Singapore is considering the purchase of an automated

Question

Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $800,000. (All currency amounts are in Singapore dollars.) An additional $560,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below:

Annual Reduction

in Costs

Labor costs $ 150,000

Material costs $ 97,000

The new machine would require considerable maintenance work to keep it properly adjusted. The company’s engineers estimate that maintenance costs would increase by $5,010 per month if the machine were purchased. In addition, the machine would require a $97,000 overhaul at the end of the sixth year.

The new etching machine would be usable for 10 years, after which it would be sold for its scrap value of $404,000. It would replace an old etching machine that can be sold now for its scrap value of $67,000. Tiger Computers, Inc., requires a return of at least 15% on investments of this type. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1.

Compute the annual net cost savings promised by the new etching machine. (Omit the "$" sign in your response.)

Annual net cost savings $

2a.

Using the data from requirement (1) and other data from the problem, compute the new machine’s net present value. (Use the incremental-cost approach.) (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value $

2b. Would you recommend that the machine be purchased?

Yes

No

3.

Assume that management can identify several intangible benefits associated with the new machine, including greater flexibility in shifting from one type of circuit board to another, improved quality of output, and faster delivery as a result of reduced throughput time. What dollar value per year would management have to attach to these intangible benefits in order to make the new etching machine an acceptable investment? (Round discount factor(s) to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

Intangible benefits $ per year

Explanation / Answer

1.)Reduction in Labor costs $150,000

Reduction in material cost $97,000

Total cost reductions $247,000

Less increased maintenance costs ($5010x12)=$60,120

Annual net cost savings $247,000-$60,120=$186,880

2.)Cost of machine $800,000

Installation and software $560,000

Slavge of old machine $67,000

Annual cost savings $186,880x4=$747,520

Overhaul required $97,000x0.37=$35,890

Salvage of new machine $404,000x0.191=$77,164

net present value = -$504,206

Since NPV is negative, the machine should not be purchased

c.)Intangibe benfits=NPV/10=$50,420.6

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