Net Present Value/Uncertain Cash Flows

Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $800,000. An additional $550,000 would be required for installation costs and for software. Management believes that the automated machine would provide substantial annual reductions in costs, as shown below:

	Annual Reduction in Costs
Labor costs	$140,000
Material costs	$96,000

The new machine would require considerable maintenance work to keep it properly adjusted. The companys engineers estimate that maintenance costs would increase by $5,000 per month if the machine were purchased. In addition, the machine would require an $81,000 overhaul at the end of the sixth year.

The new etching machine would be usable for 10 years, after which it would be sold for its scrap value of $300,000. It would replace an old etching machine that can be sold now for its scrap value of $61,000. Tiger Computers, Inc., requires a return of at least 16% on investments of this type.

a) Compute the annual net cost savings promised by the new etching machine.