\"I\'m not sure we should lay out $250,000 for that automated welding machine,\"
ID: 2573600 • Letter: #
Question
"I'm not sure we should lay out $250,000 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 $80,000 for software and installation, and another $3,000 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $45,000 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 $108,000 per year. And we would save another $6,500 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 16% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $12,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $20,000 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 11B-1 and Exhibit 11B-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 savings .Explanation / Answer
Req 1: Annual Net Cost Savings: Reduction in labor cost 108000 Reduction inMaterial Waste 6500 Total 114500 Less: Increase Maintenance cost 36000 Annual cost savings 78500 Req 2: Now 1 2 3 4 5 6 Cost of machine -250000 Software Installation -80000 Salvage value ofold Equip 1200 Annual Net Cost Savings 78500 78500 78500 78500 78500 78500 Replacement of Parts -45000 Salvage value of New equip. 20000 Total Cash flows -328800 78500 78500 33500 78500 78500 98500 Discount factor@16% 1 0.862 0.743 0.641 0.553 0.477 0.411 Present value of cash flows -328800 67667 58325.5 21473.5 43410.5 37444.5 40483.5 Net Present value -59995.5
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