"I'm not sure we should lay out $335,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "That's a lot of money, and it would cost us $91,000 for software and installation, and another $56,400 per year just to maintain the thing. In addition, the manufacturer admits it would cost $54,000 more at the end of three years to replace worn-out parts."

"I admit it's a lot of money," said Franci Rogers, the controller. "But you know the turnover problem we've had with the welding crew. This machine would replace six welders at a cost savings of $121,000 per year. And we would save another $8,200 per year in reduced material waste. When you figure that the automated welder would last for six years, I'm sure the return would be greater than our 18% required rate of return."

"I'm still not convinced," countered Mr. Alder. "We can only get $20,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $37,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow."

Annual net cost savings = 72,800

Using the data from Required 1 and other data from the problem, compute the automated welding machine's net present value.