Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine would cost $900,000. (All currency amounts are in Singapore dollars.) An additional $650,000 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:
Annual Reduction
in Costs
Labor costs . . . . . . . . . $240,000
Material costs. . . . . . . . $96,000
The new machine would require considerable maintenance work to keep it in proper adjustment. The company’s engineers estimate that maintenance costs would increase by $4,250 per month if the machine were purchased. In addition, the machine would require a $90,000 overhaul at the end of the sixth year.
The new etching machine would be usable for 10 years, after which it would be sold for its scrap value of $210,000. It would replace an old etching machine that can be sold now for its scrap value of $70,000. Tiger Computers, Inc., requires a return of at least 18% on investments of this type.
Required:
(Ignore income taxes.)
1. Compute the net annual cost savings promised by the new etching machine.
2. Using the data from (1) above and other data from the problem, compute the new machine’s net present value. (Use the incremental-cost approach.) Would you recommend that the machine be purchased? Explain.
3. Assume that management can identify several intangible benefits associated with the new machine, including greater flexibility in shifting from one type of circuit board 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 etching machine an acceptable investment?