Im not sure we should lay out $375,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot of money, and it would cost us $99,000 for software and installation, and another $5,500 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $62,000 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 $129,000 per year. And we would save another $9,000 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 14% required rate of return.

Im still not convinced, countered Mr. Alder. We can only get $24,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $45,000 for parts. But have your people work up the figures and well talk about them at the executive committee meeting tomorrow.

Required:
1.	Compute the annual net cost savings promised by the automated welding machine. Reduction in labor costs:? Reduction in material waste:? Total:? Less increased maintenance costs:? Annual net cost savings:?

2.	Using the data from (1) above and other data from the problem, compute the automated welding machines net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factors)

	Now	1	2	3	4	5	6
Cost of machine
Software and installation
Salvage value of old equipment
Annual net cost savings
Replacement of parts
Salvage value of new machine
Total cash flows
Discount factor (14%)
Present Value
Net Present value