“I’m not sure we should lay out $300,000 for that automated welding machine,” sa
ID: 2472259 • Letter: #
Question
“I’m not sure we should lay out $300,000 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 $84,000 for software and installation, and another $4,000 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $47,000 more at the end of three years to replace worn-out parts.” “I 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 $114,000 per year. And we would save another $7,500 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 17% required rate of return.” “I’m still not convinced,” countered Mr. Alder. “We can only get $17,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $30,000 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. 2a. Using the data from (1) above and other data from the problem, compute the automated welding machine’s net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) 2b. Would you recommend purchasing the automated welding machine? Yes No 3. Assume that management can identify several intangible benefits associated with the automated welding machine, including greater flexibility in shifting from one type of product to another, improved quality of output, and faster delivery as a result of reduced throughput time. What minimum dollar value per year would management have to attach to these intangible benefits in order to make the new welding machine an acceptable investment? (Use the appropriate table to determine the discount factor(s).)
Explanation / Answer
Answer 1
The annual net cost savings would be:
Answer 2a
Answer 2 b
No, the automated welding machine should not bepurchased. Its net present value is negative.
Answer v3
The dollar value per year that would be required for theintangible benefits is => NegativeNPV to be Ofset /PV Factror
=> 120763 / 3.59
=> 33639
Thus, the automated welding machine should be purchased iFmanagement believes that the intangible bene±ts are worth atleast $33639 per year
Reduction in labor costs 114000 Reduction in material waste 7500 Total 121500 Less increased maintenance costs (4000 ×12) 48000 Annual net cost savings 73500Related Questions
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