Stirling Windows Inc. of Hong Kong is considering purchasing an automated cuttin

Question

Stirling Windows Inc. of Hong Kong is considering purchasing an automated cutting machine for use in the production of its stained-glass windows.

Stirling Windows Inc. of Hong Kong is considering purchasing an automated cutting machine for use in the production of its stained-glass windows. The machine would cost $880,000. (All currency amounts are in Hong Kong dollars.) An additional $610,000 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 $165,000 $90,000 Labour costs Material costs The new machine would require considerable maintenance work to keep it in proper adjustment. The company's engineers estimate that maintenance costs would increase by $4,500 per month if the machine were purchased. In addition, the machine would require a $85,000 overhaul at the end of the fifth year. The new cutting machine would be usable for eight years, after which it would be sold for its scrap value of $160,000. It would replace an old cutting machine that can be sold now for its scrap value of $80,000 Stirling Windows requires a return of at least 13% on investments of this type. (Ignore income taxes.) Required 1. Compute the net annual cost savings promised by the new cutting machine nnual net cost savings 2-a. Using the data from requirement 1 above and other data from the problem, compute the new machine's net present value. (Use the incremental-cost approach.) (Hint. Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign Net present value 2-b. Would you recommend that the machine be purchased? 0 Yes 3. Assume that management can identify several intangible benefits associated with the new machine including greater flexibility in shifting from one type of stained-glass window 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 cutting machine an acceptable investment? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount.) Intangible benefits per vear

Explanation / Answer

Have tried to not round off but cross check calculations

a)Annual Savings = Reduction in costs - Increase in costs = $165000 + $90000 - $4500 * 12 = $201000

b)

C

NPV is negative hence won't recommend purchase

d

Net negative value that needs to be offset = -662329.77

Present value factor for 5 years = 3.51723

Intangible benefits per year = Net negative value that is required to be offset / Present value factor for useful life = 662329.77/3.51723 = 188310.05

If they think intangible benefits are worth 188310.05, they can go ahead with the purchase.

particulars year Amount Present value factor Present value Cost of Machine 0 -880000 1 -880000 Installation cost 0 -610000 1 -610000 Salvage of old machine 0 80000 1 80000 Annual savings 1-5 201000 3.51723 706963.23 Cost of overhaul 5 -85000 0.54276 -46134.59 Salvage value of new machine 5 160000 0.54276 86841.59 NPV -662329.77

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