Im not sure we should lay out $345,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot of money, and it would cost us $93,000 for software and installation, and another $4,900 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $56,000 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 $123,000 per year. And we would save another $8,400 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 14% required rate of return.

Im still not convinced, countered Mr. Alder. We can only get $21,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $39,000 for parts. But have your people work up the figures and well talk about them at the executive committee meeting tomorrow.

Required Compute the annual net cast savings promised by the automated welding machine. Reduction in labor costs Reduction in material waste Talal Lessinareased maintenance costs Annual net cost savings machine's net present value. (Any cash outflow8 8hould be Indlcated by a minua sign. Use the appropriate table to determine the dlecount factor(s).) machine Sofware and instalatan Salvage value of old equipment Annua net cost savings Replacement of parts Salvage value of new machine Totalcash Bows Net present value