PROBLEM $14-20$ Net Present Value Analysis; Uncertain Cash

Page $664$

Flows L$014-2,[014-4$

$"$I$\text{'}$m not sure we should lay out $$250,000$ for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. $"$It would cost us $$80,000$ for software and installation, and another $$36,000$ per year just to maintain. In addition, the manufacturer admits it would cost $$45,000$ 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 $$108,000$ per year. And we would save another $$6,500$ per year in reduced material waste. When you figure the automated welder would last six years, I$\text{'}$m sure the return would be greater than our $16\%$ required rate of return."

$"$I$\text{'}$m still not convinced," countered Mr$.$ Alder. $"$We can only get $$12,000$ scrap value for our old welding equipment if we sell it now, and in six years the new machine will only be worth $$20,000$ for parts."

Required:

Compute the annual net cost savings promised by the automated welding machine.

Using the data from $(1)$ above and other data from the problem, compute the automated welding machine's net present value. Would you recommend purchasing the automated welding machine? Explain.

Assume management can identify several intangible benefits associated with the automated welding machine, including greater flexibility in shifting from one type of product to another, improved quality of output, and faster delivery as a result of reduced throughput time. What minimum dollar value per year would management have to attach to these intangible benefits to make the new welding machine an acceptable investment?