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Within the realm of capital budgeting the majority of projects are not new product lines or major corporate acquisitions. The vast

majority capital budgeting decisions are replacement projects or projects considered for efficiency gains. These projects are taken on for

efficiency gains. These projects are much less risky than new product or even an expansion of production since you do not have to sell one more project to

increase our net income. A gain in efficiency or in other words a decreasing of expenses immeadetly increases net income and cash flow. It does

not require one addtional item sold. Our case will review an efficiency gain capital budgeting project.

Hence the only cash flows that are impotant are the differential cash flows.

Meadville Widgets is considering the purchase of a fully automated widget finishing machine to replace an older but still functioning but more labor

intensive model. The machine being replaced was purchased $5$ years ago for a price of $$45,000\mathrm{.}00$ at which time it had an expected life of $10$ years.

This machine is being depreciated by the straight line method with an anticiapated salvage value of $$0\mathrm{.}00$ The current market value of this machine

is estimated to be $$27,000\mathrm{.}00.$ The current machine requires one operator with an annual cost of $$37,500\mathrm{.}00$ in salary and benifits.

The replacement machine has a purchase price of $$79,500,$ a $5$ year life, and an expected salvage value of $$17,000.$ The new machine will require

a $440$ volt three phase electric service and a new concrete pad these installation expenses are $$7,500.$ Meadville Widgets expect the maintence costs to be

$$5,000$ as compared to the current costs of $$6,000$ and the defects to be $$2,000$ compared to current defect costs of $$4,000.$

Before considering the purchase of the new machine Meadville Widgets conducted and engineering study to determine if the installation costs

would be prohibitive, this study costs $$5,000.$ In order to undertake this project the firm will add $$30,000$ in debt at $11\mathrm{.}5\%$ and the required rate of return is $15\%.$

Meadville Widgets marginal tax rate is $34\%$

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