Cost The new opti-scanner machine would cost $75,000; shipping, installation, and testing would be an additional $20,000. It would cost $5,000 to dismantle the existing conveyer belt and prepare the area for the new system. To avoid disrupting production, management wanted to install the new systemsabout a 16-hour processover the next holiday weekend using existing maintenance personnel with technical staff from the manufacturer. The life expectancy of the opti-scanner was five years for capital investment purposes with a zero salvage value. The opti-scanner would probably incur an additional $1,200 per year in maintenance and insurance costs. With the machine, the company would not need the 4 inspectors employed on each of 2 shifts. These people worked 40 hours per week and received $10 per hour. The company assumed benefit costs of an extra 25%. The evening shift pay differential was an extra $0.50 per hour. Harold had informed the staff of the companys policy to not terminate employees due to automation. Affected employees would be reassigned to other jobs within the company. However, Harold believed that these positions could be eliminated within 6 months through attrition and reductions in new hires, which would be a savings to the company. Inspectors tended to be the most recent hires. While the work can be monotonous, it was critical for ensuring product quality. The position experienced a higher turnover rate than other positions. The average employee stayed about 6 months to 1 year; then, 3 out of 4 transfer to other positions and 1 quits. It costs about $300 per employee in hiring and training. The inspector position also determined which employees proved capable of more skilled and technical positions. The company had only a limited number of entry-level positions of this nature, and these positions provided a natural training ground. To justify the acquisition to top management, the machine must give the company a payback of three years or less. Harold believed the labor savings and quality improvement would easily justify and give a satisfactory return on the investment. However, given the tight margins on all the product lines, a capital investment could impact cash flow, which may hurt the companys credit rating and decrease its working capital. Since the company was privately held, top management probably needed to borrow money to finance this capital acquisition. Their long-standing association with the area banking community had allowed them to qualify for the lowest rate of 8.25% for this capital project. The company could also finance the equipment purchase from corporate earnings. Last year, company owners earned a rate of return of 14% on book equity. For planning purposes, Harold assumed that 80% of the opti-scanner would be funded by debt with the remaining funds coming from retained earnings. Their current corporate tax rate is 40%.

3. Evaluate this capital acquisition proposal and recommend a course of action.