Chapter 8 Net Present Value/Uncertain Cash Flows Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for us production of its circuit boards. The machine would cost $800,000. An additional $550,000 would be required for installation costs and for software. Management believes that the automated machine wou provide substantial annual reductions in costs, as shown below: Labor costs Material costs Annual Reduction in Costs $140,000 $96,000 The new machine would require considerable maintenance work to keep it properly adjusted. The com engineers estimate that maintenance costs would increase by $5,000 per month if the machine were purchased. In addition, the machine would require an $81,000 overhaul at the end of the sixth year The new etching machine would be usable for 10 years, after which it would be sold for its scrap valu $300.000. It would replace an old etching machine that can be sold now for its scrap value of $61,0 Computers, Inc., requires a return of at least 16% on investments of this type. a) Compute the annual net cost savings promised by the new etching machine. Reduction in labor costs + Reduction in material costs = Total cost reductions - increased maintenance costs = Annual net cost savings b) Using the data from requirement (o) and other data from the problem, compute the new machine's present value. Year Cash Flow 16% Factor PV Cost of the machine Installation and software Salvage of the old machine Annual cost savings Overhaul required Salvage of the new machine Net present value c) Based upon NPV, would you recommen d) Assume that management can identify several intangible benefits associated with the new machine, including greater flexibility in shifting from one type of circuit board to another, improved quality of output, and faster delivery as a result of reduced throughput time. What dollar value per year would management have to attach to these intangible benefits in order to make the new etching machine an acceptable Investment Simple Rate of Return/Payback Period Lugano's Pizza Parlor is considering the purchase of a large oven and related equipment for mixing and baking "crazy bread." The oven and equipment would cost $289,000 delivered and installed. It would be usable for about 15 years, after which it would have a 10% scrap value. The pizza parlor uses straight-line depreciation on all assets. Annual cash inflows for the "crazy bread" would be $144,000 and annual cash outflows would be $86,200. a) What is the simple rate of return on the new pizza oven and equipment? b) If a simple rate of return above 12% is acceptable to Mr. Lugano, will he purchase the oven and equipment c) What is the payback period of the pizza oven and equipment? d) Mr. Lugano purchases any equipment with less than a 6-year payback, will be purchase this equipment