I\'m not sure we should lay out $375,000 for that automated welding machine, sai

Question

I'm not sure we should lay out $375,000 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 $99,000 for software and installation, and another $5,500 every month just to maintain the thing. In addition, the manufacturer adrnits that it would cost 62,000 more at the end of three years to replace worn-out parts admit it's a lot of money, said Franci Rogers, the controller. "But you know the turnover problem weve had with the welding crew. This machine would replace six welders at a cost savings of $129,000 per year And we would save another S9,000 per year in reduced material waste. When you figure that the automated welder would last for six years, rm sure the return would be greater than our 14% required rate of return I'm still not convinced," countered Mr. Alder. "We can only get $24,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $45,000 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 detemine the appropriate discount factor(s) using ables 1. Compute the annual net cost savings promised by the automated welding machine. Reduction in labor costs Reduction in matenal waste Total Less increased maintenance costs Annual net cost savings S 129 138,000 S 138.000 2a. Using the data from (1) above and other data from the problem, compute the automated welding machines net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factors.) $(375,000) 99,000 Cost af machine Sofware and installation Salvage value of old equipment Annual net cost savings Replacement of parts Salvage value of new machine Total cash flows Discount factor (14%) Present value Net present value 24,500 $(449,500) $ 2b. Would you recommend purchasing the automated welding machine? Yes No

Explanation / Answer

1 Computation of Annual net cost Savings Amount in $ Reduction in labour Costs 129000 Reduction in material Waste 9000 Total 138000 less: Incresed maintainance Costs $5500*12 66000 Annual Net Cost Savings 72000 2 a )Computation of net present value Now 1 2 3 4 5 6 Cost of the machine -375000 Software & Instalation -99000 Salvege value of old Equipment 24500 Annual Net Cost Savings 72000 72000 72000 72000 72000 72000 replacement of parts -62000 Salvege value of new machine 45000 Total cash Flows -449500 72000 72000 10000 72000 72000 117000 Discount factor at 14% 1 0.877 0.769 0.675 0.592 0.519 0.456 present value Cash flows -449500        63,144        55,368         6,750        42,624        37,368        53,352 Net presaent value -190894 2b) rcomendation of the project Answer is " NO" Purchaseing of the Automated Welding machine is Not Recommended because of is Net present value is Negitive. project can be accepted only if the NPV is Positive or Zero

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