Question

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 $960,000. (All currency amounts are in Hong Kong dollars.) An additional $710,000 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
Labour costs	$	142,000
Material costs	$	90,500

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 $6,000 per month if the machine were purchased. In addition, the machine would require a $88,000 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 $220,000. It would replace an old cutting machine that can be sold now for its scrap value of $83,500. Stirling Windows requires a return of at least 15% on investments of this type. (Ignore income taxes.)

Required:

1.	Compute the net annual cost savings promised by the new cutting machine.

       

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.)

         

2-b.	Would you recommend that the machine be purchased?
	Yes No

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.)

       

Answer 1