Stirling Windows Inc. of Hong Kong is considering purchasing an automated cutting machine for use in the production of its stained-glass windows. The machine would cost $675,000. (All currency amounts are in Hong Kong dollars.) An additional $487,500 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:

The new machine would require considerable maintenance work to keep it in proper adjustment. The companys engineers estimate that maintenance costs would increase by $3,200 per month if the machine were purchased. In addition, the machine would require a $67,500 overhaul at the end of the fifth year.

The new cutting machine would be usable for eight years, after which it would be sold for its scrap value of $157,500. It would replace an old cutting machine that can be sold now for its scrap value of $52,500. Stirling Windows requires a return of at least 16% on investments of this type. (Ignore income taxes.)

Required: 1. Compute the net annual cost savings promised by the new cutting machine.

Annual Net Cost Savings: ?

2-a. Using the data from requirement 1 above and other data from the problem, compute the new machines net present value. (Use the incremental-cost approach.) (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.)

Net Present Value: ?

2-b. Would you recommend that the machine be purchased?

Yes or no

3. Assume that management can identify several intangible benefits associated with the new machine, including greater flexibility in shifting from one type of stained-glass window to another, improved quality of output, and faster delivery as a result of reduced throughput time. What dollar value per year would management have to attach to these intangible benefits in order to make the new cutting machine an acceptable investment? (Hint: Use Microsoft Excel to calculate the discount factor(s).)

Intangible benefits: ?

Annual Reduction in Costs $180,000 $ 72,000 Labour costs Material costs