CUCK HERE TO SAVE YOUR WORK 1 H F G D B Stirling Windows Inc. is considering purchasing an automated cutting machine for use in the production of its stained glass windows. It will replace the current cutting machine which will be sold. The new machine will require a major overhaul at the end of the sixth year and will be disposed of at the end of its ten year useful life. Below is the information management has on the new cutting machine and the old cutting machine: =PV(rate,nper,pmt, [fv],[type]) 3 PV Factor = 1/((1+i%)^yr) =IRR(arrayvals) =IRR(arrayvals, estimate) Cost of the machine Installation and software costs Annual reduction in labour costs Annual reduction in material costs Increase in monthly maintenance costs Cost of overhaul Salvage value of the new machine Salvage value of the old machine Required rate of return $950,000 $700,000 $290,000 $93,000 $5,260 $93,000 $200,000 $85,000 18% =PMT(rate,nper,pval,[fval],type) 1 Required: 1. Compute the net annual cost savings promised by the new cutting machine. (1 mark) Net annual cost savings 21 D 2. Using the answer from part 1 and the other data provided, calculate the net present value of the new machine. (11 marks) Ignore income taxes 22 Amount of the cash flows Present value of the cash flows Item Year(s) 4 5 5 3. Assume that management can identify several intangible benefits associated with the new machine. What dollar value per year would management have to attach to these intangible benefits in order to make the new cutting machine an acceptable investment? (1 mark) Intangible benefits per year 3. Assume that management can identify several intangible benefits associated with the new machine. What dollar value per year would management have to attach to these intangible benefits in order to make the new cutting machine an acceptable investment? (1 mark) 2 Intangible benefits per year 1 5. 54. Will the internal rate of return be higher or lower than the required rate of return?. (1 mark)