Chapter 12, Problem 20P

To determine

To analysis:

Whether to purchase the automated welding machine or not.

Answer to Problem 20P

Solution:

No, it is not advisable to purchase the automated welding machine.

Explanation of Solution

On the basis of net present value, it will be decided whether to purchase the automated welding machine or not.

The net present value of the automated machine will be calculated as under −

The present value of cash outflows will be calculated as under −

Given,

• Cost of machine = $ 250,000
• Software and installation = $ 80,000
• Salvage value of old machine = $ 12,000
• Replacement parts cost in year 3 = $ 45,000

Total Present value of cash out flows
Cost of machine		250,000
Software and installation		80,000
Less: Salvage value of old machine		-12,000
Present value of replacement of parts
Replacement parts cost	45,000
PVIF @ 16 % for 4 year	0.552	24,840
Total Present value of cash out flows		342,840

The total present value of cash outflows = $ 342,840.

Now, the present value of cash inflows will be calculated as −

Given,

• Annual net savings from year 1 to 6 = $ 78,500
• Salvage value of new machine at the year of year 6 = $ 20,000

Total present value of Cash Inflows
Year		PVIF @ 16 % (2)	Present value of cash inflow (1) X (2)
1 to 6	Annual net savings = $ 78,500	3.685	289,272.50
6	Salvage value = $ 20,000	0.410	8,200
Total present value of Cash Inflows	297,472.50

The present value of cash inflows = $ 297,472.50.

Now, the net present value of automated welding machine will be calculated as under −

Given,

Total present value of cash inflows = $ 297,472.50.

Total present value of cash outflows = $ 342,840

  $\begin{array}{l}Netpresentvalue=Totalpresentvalueofcashinflows-Totalpresentvalueofcashoutflows\hfill \\ Netpresentvalue=\$297,\mathrm{472.50.}-\$342,840\hfill \\ Netpresentvalue=\text{ - }\$\text{ 45,367}.50\hfill \end{array}$

The net present value is = - $ 45,367.50 i.e., negative, so it is not advisable to purchase the automated welding machine.

Note: PVIF values are taken from the charts provided.

Conclusion

Thus, it is not advisable to purchase the automated welding machine.

Requirement 3

To determine

To compute:

Minimum dollar value per year to make the new welding machine as acceptable investment.

Answer to Problem 20P

Solution:

Minimum dollar value per year to make the new welding machine as acceptable investment = $ 12,311.40

Explanation of Solution

The minimum dollar value per year to make new welding machine as acceptable investment will be calculated as under −

Given,

• Net present Value of welding machine = - $ 45,367.50
• PVAF @ 16 % for 6 years = $ 3.6853

  $\begin{array}{l}Minimumdollarvalueperyear=\frac{NetpresentValueofweldingmachine}{PVAF@16\%for6years}\\ Minimumdollarvalueperyear=\frac{\text{\$ 45,367}\text{.50 }}{3.685}\\ Minimumdollarvalueperyear=\$12,311.40\end{array}$

The machine should provide at least a benefit of $ 12,311.40 per year to make it acceptable.

Conclusion

Thus, the minimum dollar value per year to make the new welding machine as acceptable investment has been calculated.