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Im not sure we should lay out $260,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot

Im not sure we should lay out $260,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot of money, and it would cost us $79,000 for software and installation, and another $3,500 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $42,000 more at the end of three years to replace worn-out parts.

I admit its a lot of money, said Franci Rogers, the controller. But you know the turnover problem weve had with the welding crew. This machine would replace six welders at a cost savings of $109,000 per year. And we would save another $7,000 per year in reduced material waste. When you figure that the automated welder would last for six years, Im sure the return would be greater than our 20% required rate of return.

Im still not convinced, countered Mr. Alder. We can only get $14,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $25,000 for parts. But have your people work up the figures and well talk about them at the executive committee meeting tomorrow.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

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choose numerator Choose denominator intangible benefits
intangible benefits

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