"I'm not sure we should lay out $295,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "It would cost us $83,000 for software and installation, and another $46,800 per year just to maintain. In addition, the manufacturer admits it would cost $46,000 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 $113,000 per year. And we would save another $7,400 per year in reduced material waste. When you figure the automated welder would last 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 $16,500 scrap value for our old welding equipment if we sell it now, and in six years the new machine will only be worth $29,000 for parts."

"I'm not sure we should lay out $295,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "It would cost us $83,000 for software and installation, and another $46,800 per year just to maintain. In addition, the manufacturer admits it would cost $46,000 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 $113,000 per year. And we would save another $7,400 per year in reduced material waste. When you figure the automated welder would last 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 $16,500 scrap value for our old welding equipment if we sell it now, and in six years the new machine will only be worth $29,000 for parts."

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

"I'm not sure we should lay out $295,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment
Company. "It would cost us $83,000 for software and installation, and another $46,800 per year just to maintain. In addition, the
manufacturer admits it would cost $46,000 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 $113,000 per year. And we would save another $7,400 per year in reduced
material waste. When you figure the automated welder would last 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 $16,500 scrap value for our old welding equipment if we sell it now, and
in six years the new machine will only be worth $29,000 for parts."
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. Compute the annual net cost savings promised by the automated welding machine.
2a. Using the data from Required 1 and other data from the problem, compute the automated welding machine's net present value.
2b. Would you recommend purchasing the automated welding machine?
3. Assume management can identify several intangible benefits associated with the automated welding machine, including greater
flexibility in shifting from one type of product to another, improved quality of output, and faster delivery as a result of reduced
throughput time. What minimum dollar value per year would management have to attach to these intangible benefits to make the new
welding machine an acceptable investment?

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Step 1: Decision making:

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Step 2: (1) Compute the annual net cost savings promised by the automated welding machine:

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Step 3: (2.a) Compute the automated welding machine’s net present value:

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Step 4: (2.b) Recommendation on purchasing of the automated welding machine:

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Step 5: (3) Determine minimum dollar value per year would management have to attach:

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I’m not sure we should lay out $265,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “It would cost us $78,000 for software and installation, and another $40,800 per year just to maintain. 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 the automated welder would last 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 for our old welding equipment if we sell it now, and in six years the new machine will only be worth $24,000 for parts.” Click here to…
These are the values I was solving for, but I'm being told the $6,393,505.38 is incorrect. Not sure what I'm doing wrong. Thanks!