I’m not sure we should lay out $295,000 for that automated welding machine,” sai
ID: 2526809 • Letter: I
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I’m not sure we should lay out $295,000 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 $83,000 for software and installation, and another $3,900 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $46,000 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 $113,000 per year. And we would save another $7,400 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 19% required rate of return.“I’m still not convinced,” countered Mr. Alder. “We can only get $16,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $29,000 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 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.
1. Compute the annual net cost savings promised by the automated welding machine. Reduction in lsbor costs n in matenal waste Total Less increased me ntenance costs Annual net cost savings 2a Using the data trom (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. Round discount factonis) to 3 decimal places.) Cost of machine Sotwarc and inatal ation Salrage value of old equipment Annual net cost savings Replacement of parts Savage vslue of new machine Total cash lows Discount factor (19%) Present value Net present value 2b. Would you recommend purchasing the automated welding machine? 3. Assume that management can idenlify several intangible benefis associated wilh the automated welding machine, indluding greater lexibility in shiling from one type of product to another, improved qalit of output, and faster delivery as a resull of reduced throughput time. What dollar value per year would management have to attach to these intangible benefits in order to make the new welding machine an acceptable investment? (Enter all amounts as positive values. Round discount factorís) to 3 decimal places.) Choose htangble benefteExplanation / Answer
a) Net annual cost savings Reduction in labor costs $113,000.00 Reduction in material waste $7,400.00 Total $120,400.00 Less increased maintenance costs (3800 x 12) -$46,800.00 Annual net cost savings $73,600 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).) 0 1 2 3 4 5 6 cost of new machine -$295,000.00 software and installation -$83,000.00 salvage value of old equipment $16,500.00 annual net cost savings $73,600 $73,600 $73,600 $73,600 $73,600 $73,600 replacement of old parts -$46,000.00 salvage value of new machine $29,000.00 total cash flows -$361,500.00 $73,600 $73,600 $27,600 $73,600 $73,600 $102,600 discount factor (19%) 1.0000 0.8403 0.7062 0.5934 0.4987 0.4190 0.3521 present value -$361,500.00 $61,848.74 $51,973.73 $16,378.28 $36,702.02 $30,842.03 $36,129.8 net present value -$127,625.40 2b. Would you recommend purchasing the automated welding machine? No, because NPV is Negative 3) Minimum Dollar Value that would be required for the intangible benefits = FV -$127,625.40 Rate 19.00% Nper 6 Minimum Dollar Value =PMT(19%,6,-127,625.40) $37,429.25 or Minimum Dollar Value = NPV/(PVOA(19%,6) Minimum Dollar Value = -$127625.40/3.41 $37,429.25
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