"I'm not sure we should lay out $265,000 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 $78,000 for software and installation, and another $40,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $41,000 more at the end of three years to replace worn-out parts." "I admit it's a lot of money," said 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 $108,000 per year. And we would save another $6,900 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 19% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $14,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $24,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow."
"I'm not sure we should lay out $265,000 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 $78,000 for software and installation, and another $40,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $41,000 more at the end of three years to replace worn-out parts." "I admit it's a lot of money," said 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 $108,000 per year. And we would save another $6,900 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 19% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $14,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $24,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow."
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
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Transcribed Image Text:**Discussion on Automated Welding Machine Investment**
Jim Alder, president of the Superior Equipment Company, raises concerns about investing in an automated welding machine due to its high cost. The machine is priced at $265,000, with additional expenditures of $78,000 for software and installation, and $40,800 annually for maintenance. Additionally, the manufacturer estimates a cost of $41,000 after three years for replacing worn-out parts.
Franci Rogers, the company's controller, argues that despite the high initial investment, the machine addresses the company's welding crew turnover issues. It has the potential to replace six welders, resulting in an annual savings of $108,000. Furthermore, it would reduce material waste, saving an additional $6,900 annually. Rogers believes that, over a six-year lifespan, the machine's returns would exceed the company's 19% required rate of return.
However, Alder remains skeptical. He notes that the existing welding equipment would fetch only $14,000 if sold as scrap now, and estimates the new machine's value to be $24,000 for parts after six years. Alder concludes the discussion by requesting a detailed financial analysis for review at the upcoming executive committee meeting.
![**Annual Net Cost Savings and Evaluation of Automated Welding Machine**
1. **Compute the Annual Net Cost Savings Promised by the Automated Welding Machine.**
- **Annual Net Cost Savings:** [Input Field]
2. **Calculate the Net Present Value (NPV)**
- Using the data from above and other relevant information, calculate the automated welding machine's net present value. Use negative amounts for losses. Round your final answer to the nearest whole dollar.
- **Net Present Value:** [Input Field]
3. **Decision on Purchasing the Automated Welding Machine**
- Would you recommend purchasing the automated welding machine?
- [ ] Yes
- [ ] No
4. **Consideration of Intangible Benefits**
- Consider that management can identify intangible benefits such as:
- Greater flexibility in production shifts
- Improved quality of output
- Faster delivery due to reduced throughput time
- Determine the minimum dollar value per year that would need to be attached to these intangible benefits for the welding machine to be considered a viable investment. Round your final answer to the nearest whole dollar.
- **Minimum Dollar Value of Intangible Benefits:** [Input Field]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F98955d5b-0f56-441c-9a7d-870dfcd904bf%2Fd834ed73-4b3d-44d2-957f-51f56fa5f25c%2F3ljrric_processed.png&w=3840&q=75)
Transcribed Image Text:**Annual Net Cost Savings and Evaluation of Automated Welding Machine**
1. **Compute the Annual Net Cost Savings Promised by the Automated Welding Machine.**
- **Annual Net Cost Savings:** [Input Field]
2. **Calculate the Net Present Value (NPV)**
- Using the data from above and other relevant information, calculate the automated welding machine's net present value. Use negative amounts for losses. Round your final answer to the nearest whole dollar.
- **Net Present Value:** [Input Field]
3. **Decision on Purchasing the Automated Welding Machine**
- Would you recommend purchasing the automated welding machine?
- [ ] Yes
- [ ] No
4. **Consideration of Intangible Benefits**
- Consider that management can identify intangible benefits such as:
- Greater flexibility in production shifts
- Improved quality of output
- Faster delivery due to reduced throughput time
- Determine the minimum dollar value per year that would need to be attached to these intangible benefits for the welding machine to be considered a viable investment. Round your final answer to the nearest whole dollar.
- **Minimum Dollar Value of Intangible Benefits:** [Input Field]
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