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The Machine Tool Division is considering the purchase of a piece of highly automated, robotic production equipment. It would replace older machines and would offer
The Machine Tool Division is considering the purchase of a piece of highly automated, robotic production equipment. It would replace older machines and would offer improvements in quality, and some additional capacity for expansion. They are currently using several old-style machines that together had cost $700,000. Depreciation of $220,000 has already been charged against this total cost; depreciation charges are $80,000 annually. Management believes these machines will need to be replaced after six more years. They have a current market value of $250,000. The old machines require 12 workers per shift earning $13.50/hr plus 3 maintenance workers paid $14.50/hr. The plant operates eight-hour day and afternoon shifts five days each week; maintenance workers are assigned to the afternoon shift only. Maintenance expenses have been running at $5,000 annually; the cost of electricity has been $26,600 per year. The new machine will have a total cost that includes shipping, installation and testing of $1.5 million. The plant will also need $350,000 in modifications to accommodate the new machine. These costs will be capitalized and depreciated over the six-year estimated life of the machine. The new machine would require only two skilled operators (one per shift) who would earn $20/hr. Maintenance will be outsourced and cost $90,000 per year. The annual cost of electricity is estimated to be $50,000. Question: Identify and analyze the relevant cash flows for the two alternatives - buying the new machine vs. continuing to use the old ones. Cash flows for both alternatives occur for both machines over 6 years (beginning in year zero and ending in year 5). Capital analysis techniques should be done on the cash flows which should include (but not limited to) Net Present Value (NPV) analysis
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