Question
The Viva Injection Molding Machine The new injection molding machine would replace six semiautomated injection molding machines that together had originally cost $620,000. Cumulative depreciation
The Viva Injection Molding Machine The new injection molding machine would replace six semiautomated injection molding machines that together had originally cost $620,000. Cumulative depreciation of $248,000 had already been charged against the original cost and six years of depreciation charges remained over the total useful life of 10 years. Schaefer Engineering's management believed that those semiautomated machines would need to be replaced after six years. Steven had recently received an offer of 270,000 for the six machines. The current six machines required 12 workers per shift (24 workers in total for two shifts per working day) at $16.00 per worker per hour, plus the equivalent of two maintenance workers (working one shift per day), each of whom was paid $17.00 an hour, plus maintenance supplies of $10,000 a year. Steven assumed that the semiautomated machines, if kept, would continue to consume electrical power at the rate of $22,000 a year. The Viva injection molding machine was produced by a company in Madison, Wisconsin. Schaefer Engineering had received a firm offering price of $1.92 million from the Wisconsin firm. The estimate for modifications to the plant, including wiring for the machine's power supply, was $120,000. Allowing for $35,000 for transportation, installation, and testing, the total cost of the Viva machine was expected to be $2.075 million, all of which would be capitalized and depreciated for tax purposes over six years. Steven assumed that, at a high and steady rate of machine utilization, the Viva would be worthless after the sixth year and need to be replaced. 3 The new machine would require two skilled operators (one per shift), each receiving $24.00 an hour (including benefits), and contract maintenance of $110,000 a year, and would incur power costs of $37,000 yearly. In addition, the automatic machine was expected to save at least $40,000 yearly through improved labor efficiency in other areas of the production. Certain aspects of the Viva purchase decision were difficult to quantify. First, Steven was unsure whether the tough collective-bargaining agreement his company had with the employees' union would allow him to lay off the 24 operators of the semiautomated machines. Reassigning the workers to other jobs might be easier, but the only positions needing to be filled were unskilled jobs, which paid $12.00 an hour. The extent of any labor savings would depend on negotiations with the union. Second, Steven believed that the Viva would result in even higher levels of product quality and lower defect rates than the company was now boasting. In light of the ever-increasing competition, this outcome might prove to be enormous, but currently unquantifiable, competitive importance. Finally, the Viva had a theoretical maximum capacity that was 30% higher than that of the six semiautomated machines; but those machines were operating at only 90% of capacity, and Steven was unsure when added capacity would be needed. There was plenty of uncertainty about the economic outlook in the U.S., and the latest economic news suggested that the economies of the U.S. might be headed for a slowdown.
(assume 8 hours per shift, 2 shifts per working day, and 210 working days per year): Does the net present value (NPV) warrant the investment in the Viva machine?
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