"I'm not sure we should lay out $250,000 for the automatied welding machine," said Jim Alder, president of the Superior Equipment Company. "That's a loy of money, and it would cost us $80,000 for software nd installation, and another $3,000 every month just to maintaine the thing. In addiion, the manufacturer admits that it would cost $45,000 more at the end of 3 years to replace worn-ot parts.

"I admit it's a lot of money," said Franci Rodgerts, the controller. "But you know the turnove problem we've had within the welding crew. This machine would replace 6 welders at a cost savings of $108,000 per year. And we would save $6,500 per year in reduced matieral waste. When you figure that the automated welder would last for 6 years. I'm sure the return would be greater than our 16% 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 equiment if we sell it now, and in 6 years the new machine will only be worth $20,000 for parts. But have your people work up figures and we'll talk about them at the executive committee meeting tomorrow."

Required:

1. compute the annual net cost savings promised by the automated welding machine.

2. Using the data from above (1) and other data from the problem, compute the automated welding machine's net present value. Would you recommend purchasing the automated welding machine? Explain.