Within the realm of capital budgeting the majority of projects are not new product lines or major corporate acquisitions. They are replacement projects or projects considered for efficiency gains. Projects taken on for efficiency gains are much less risky than new product lines or large acquisitions. A gain in efficiency or in other words a decreasing of expenses immeadetly increases net income and cash flow. It does not require one additional item sold. Our case will review an efficiency gain capital budgeting project.

Meadville Widgets is considering the purchase of a fully automated widget finishing machine to replace an older but still functioning but more labor intensive model.

The machine being replaced was purchased 5 years ago for a price of $45,000.00 at which time it had an expected life of 10 years.

This machine is being depreciated by the straight line method with an anticipated salvage value of $0.00.

The current market value of this machine is estimated to be $27,000.00.

The current machine requires one operator with an annual cost of $37,500.00 in salary and benefits.

The replacement machine has a purchase price of $79,500, a 5 year life, and an expected salvage value of $17,000.

The new machine will require a 440 volt three phase electric service and a new concrete pad these installation expenses are $7,500.

Meadville Widgets expect the maintanence costs to be $5,000 as compared to the current costs of $6,000 and the defects to be $2,000 compared to current defect costs of $4,000.

Before considering the purchase of the new machine Meadville Widgets conducted and engineering study to determine if the installation costs would be prohibitive.

The Supreme Shoe Company Replacement Analvsis Old MachineNew MachineDifference Price Shipping and Instal Original Life Current Life Original Salvage Value Current Salvage Value Book Value Increase in Raw Materials Depreciation Salaries Maintenance Defects Marginal Tax Rate Required Return 34.00% 15.00% Cash Flows Period Cash Flows Initial Outlay Annual After-Tax Savings Depreciation Tax Benefit 2 Total ATCF Terminal Cash Flow 4 Payback Period Net Present Value (NPV) Profitability Index (PI) Internal Rate of Return (IRR) MIRR The Supreme Shoe Company Replacement Analvsis Old MachineNew MachineDifference Price Shipping and Instal Original Life Current Life Original Salvage Value Current Salvage Value Book Value Increase in Raw Materials Depreciation Salaries Maintenance Defects Marginal Tax Rate Required Return 34.00% 15.00% Cash Flows Period Cash Flows Initial Outlay Annual After-Tax Savings Depreciation Tax Benefit 2 Total ATCF Terminal Cash Flow 4 Payback Period Net Present Value (NPV) Profitability Index (PI) Internal Rate of Return (IRR) MIRR