"I'm not sure we should lay out $335,000 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 $91,000 for software and installation, and another $56,400 per year just to maintain the thing. In addition, the manufacturer admits it would cost $54,000 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 $121,000 per year. And we would save another $8,200 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 18% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $20,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $37,000 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 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?
"I'm not sure we should lay out $335,000 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 $91,000 for software and installation, and another $56,400 per year just to maintain the thing. In addition, the manufacturer admits it would cost $54,000 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 $121,000 per year. And we would save another $8,200 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 18% required rate of return." "I'm still not convinced," countered Mr. Alder. "We can only get $20,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $37,000 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 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:"I'm not sure we should lay out $335,000 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 $91,000 for software and installation, and another $56,400 per year just to
maintain the thing. In addition, the manufacturer admits it would cost $54,000 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 $121,000 per year. And we would save another $8,200 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 18% required rate of return."
"I'm still not convinced," countered Mr. Alder. "We can only get $20,500 scrap value out of our old welding equipment if we sell it now,
and in six years the new machine will only be worth $37,000 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 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?
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