“I’m not sure we should lay out $260,000 for that automated welding machine,” sa
ID: 2484473 • Letter: #
Question
“I’m not sure we should lay out $260,000 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 $79,000 for software and installation, and another $3,500 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $42,000 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 $109,000 per year. And we would save another $7,000 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 20% required rate of return.”
“I’m still not convinced,” countered Mr. Alder. “We can only get $14,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $25,000 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.
Compute the annual net cost savings promised by the automated welding machine
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).)
“I’m not sure we should lay out $260,000 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 $79,000 for software and installation, and another $3,500 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $42,000 more at the end of three years to replace worn-out parts.”
Explanation / Answer
1 Annual Net Cost Saving Amt in $ Reduction in labor Cost 109,000 Reduction in material Waste 7,000 Total 116,000 Less: Increased in Maintenance Cost 42,000 Annual Ne Cost Saving 74,000 2a Now 1 2 3 4 5 6 Cost of machine -260,000 Software Installation -79000 Salvage Value of Old Equipment 14500 Annual Net Cost Saving 74000 74000 74000 74000 74000 74000 Replacements of Parts -42000 Salvage Value of New Machine 25000 Total Cash Flow -324,500 74,000 74,000 32,000 74,000 74,000 99,000 Discount factor (20%) 20% 20% 20% 20% 20% 20% 20% Present value -324,500 61,667 51,389 18,519 35,687 29,739 33,155 Net present value -94,345 2 b NPV is negetive so not recommend
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