Question

“I’m not sure we should lay out $290,000 for that automated welding machine,” said Jim Alder. “That’s a lot of money, and it would cost us $82,000 for software & installation, & another $3,800 every month just to maintain. In addition, the manufacturer admits that it would cost $45,000 more at the end of three years to replace worn-out parts.”

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 $112,000 per year. And we would save another $7,300 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 15% required rate of return.”

Mr. Alder. “We can only get $16,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $28,000 for parts.

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 labor costs:

reduction in material waste:

total:

Less increased Maintenance costs:

Annual net cost savings:

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. Round discount factor(s) to 3 decimal places.)

  

3. Assume that management can identify several intangible benefits associated with the automated welding machine. 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 factor(s) to 3 decimal places.)

Answer 1

a) Net annual cost savings
Reduction in labor costs	$112,000
Reduction in material waste	$7,300
Total	$119,300
Less increased maintenance costs (3800 x 12)	-$45,600.00
Annual net cost savings	$73,700
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	-$290,000.00
software and installation	-$82,000.00
salvage value of old equipment	$16,000
annual net cost savings		$73,700	$73,700	$73,700	$73,700	$73,700	$73,700
replacement of old parts				-$45,000.00
salvage value of new machine							$28,000
total cash flows	-$356,000.00	$73,700	$73,700	$28,700	$73,700	$73,700	$101,700
discount factor (15%)	1.0000	0.8696	0.7561	0.6575	0.5718	0.4972	0.4323
present value	-$356,000.00	$64,086.96	$55,727.79	$18,870.72	$42,138.21	$36,641.93	$43,967.72
net present value	-$94,566.68
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	-$94,566.68
Rate	15.00%
Nper	6
Minimum Dollar Value =PMT(15%,6,-94,566.68)	$24,988.01
or
Minimum Dollar Value = NPV/(PVOA(15%,6)
Minimum Dollar Value = -$94566.68/3.78	$24,988.01