7.20

Required:

Compute the annual net cost savings promised by the automated welding machine.

Using the data from (1) above and other data from the problem, compute the automated weld-

ing machine's net present value. Would you recommend purchasing the automated welding

machine? Explain.

Assume that management can identify several intangible benefits associated with the auto

mated welding

machine, including greater flexibility in shifting from one type of product 10

another, improved quality of output, and faster delivery as a result of reduced throughput time.

What minimum dollar value per year

in order

to make

would management have to attach to these intangible

the new welding

machine an acceptable investment?

PROBLEM 7-20 Not Present Value Analysis: Uncertain Cash Flows L07-2, L07-4 "I'm not sure we should lay out $250,000 for that automated welding machine," said Jim Alder president of the Superior Equipment Company. "That's a lot of money, and it would costs $80,000 for software and installation, and another $36.000 per year just to maintain the thing. In addition, the manufacturer admits it would cost $45.000 more at the end of three years to replace wom-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 sa ings of S108.000 per year. And we would save another $6,500 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 16 e required rate of return." I'm still not convinced, countered Mr. Alder. "We can only get $12,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $20.000 for parts. But have your people work up the figures and we'll talk about them at the execu- tive committee meeting tomorrow." Required: 1. Compute the annual net cost savings promised by the automated welding machine. 2. Using the data from (1) above and other data from the problem.compute the automated weld- ing machine's net present value. Would you recommend purchasing the automated welding machine? Explain 3. Assume that management can identify several intangible benefits associated with the auto- mated 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 in order to make the new welding machine an acceptable investment? PROBLEM 7-21 Preference Rankinn tl The man