“I’m not sure we should lay out $360,000 for that automatedwelding machine,” said Jim Alder, president of the SuperiorEquipment Company. “That’s a lot of money, and it would cost us$96,000 for software and installation, and another $62,400 per yearjust to maintain the thing. In addition, the manufacturer admits itwould cost $59,000 more at the end of three years to replaceworn-out parts.”
“I admit it’s a lot of money,” said Franci Rogers, thecontroller. “But you know the turnover problem we’ve had with thewelding crew. This machine would replace six welders at a costsavings of $126,000 per year. And we would save another $8,700 peryear in reduced material waste. When you figure that the automatedwelder would last for six years, I’m sure the return would begreater than our 17% required rate of return.”
“I’m still not convinced,” countered Mr. Alder. “We can only get$23,000 scrap value out of our old welding equipment if we sell itnow, and in six years the new machine will only be worth $42,000for parts. But have your people work up the figures and we’ll talkabout them at the executive committee meeting tomorrow.”
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe appropriate discount factor(s) using tables.
Required:
1. Compute the annual net cost savings promised by the automatedwelding machine.
2a. Using the data from (1) above and other data from theproblem, compute the automated welding machine’s net presentvalue.
2b. Would you recommend purchasing the automated weldingmachine?
3. Assume that management can identify several intangiblebenefits associated with the automated welding machine, includinggreater flexibility in shifting from one type of product toanother, improved quality of output, and faster delivery as aresult of reduced throughput time. What minimum dollar value peryear would management have to attach to these intangible benefitsin order to make the new welding machine an acceptableinvestment?
