T\'m not sure we should lay out $355,000 for that automated welding machine,\" s
ID: 2417672 • Letter: T
Question
T'm not sure we should lay out $355,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. That's a lot of money, and it would cost us $95,000 for software and installation, and another $5,100 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $58,000 more at the end of three years to replace worn-out parts. l admit it's a lot of money," said Franci Rogers, the controller. "But you know the turnover problem we've had with the welding crew. This machine would replace six welders at a cost savings of $125,000 per year. And we would save another $8,600 per year in reduced material waste. When you figure that the automated welder would last for six years, I'm sure the return would be greater than our 16% required rate of return Tm still not convinced," countered Mr. Alder. We can only get $22,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $41,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow. 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 automated welding machine. Reduction in labor costs Reduction in material waste Total Less increased maintenance costs Annual net cost savingsExplanation / Answer
Since Net Present Value is negative we can not recommend to purchase Automated Welding machine
3.Computation of Dollar Value:
Dollar Value that would be required =$226161/3.683
=$61406.
1 Computation of Annual net Savings cost by the automated welding Machine Reduction in Labour Costs 125000 Reduction in Material Wastage 8600 Total 133600 Less: Maintenance cost(5100*12) 61200 Net Savings 72400 2 Calculation of Net Present Value Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cost of the Machine -355000 Software and Installation -95000 Salvage value of old Equipment 22500 Annual Net Cost Savings 72400 72400 72400 72400 72400 72400 Replacement of Parts -58000 Salvage value of new Machine 41000 Total Cash Flows -472500 72400 72400 14400 72400 72400 113400 Discount Factor(16%) 0.862 0.743 0.64 0.552 0.476 0.41 Present Value(Cash Flow*D.F) -472500 62408.8 53793.2 9216 39964.8 34462.4 46494 Net Present Value -226161Since Net Present Value is negative we can not recommend to purchase Automated Welding machine
3.Computation of Dollar Value:
Dollar Value that would be required =$226161/3.683
=$61406.
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