Question: Arizona Mechanical recently created a new product, a computer-controlled, laser-precise lathe, and Ohio Ornamental Metals is considering purchasing one. Ohio's CFO received the following information
Arizona Mechanical recently created a new product, a computer-controlled, laser-precise lathe, and Ohio Ornamental Metals is considering purchasing one. Ohio's CFO received the following information from the accounting department regarding the company's existing lathe and the new Arizona Mechanical lathe. The savings in operating costs offered by the new lathe would mostly derive from reduced waste, reduced labor, and energy cost savings.
Old Machine
Original cost ............$875,000
Present book value .........$150,000
Annual cash operating costs ......$450,000
Market value now ..........$200,000
Market value in 5 years......... $0
Remaining useful life ........ 5 years
New Machine
Cost ...............$1,600,000
Annual cash operating costs ....... $155,000
Market value in 5 years ........ $0
Useful life ............. 5 years
a. Based on financial considerations alone, should Ohio Ornamental Metals purchase the new lathe? Show computations to support your answer.
b. What qualitative factors should Ohio Ornamental Metals consider before making a decision about purchasing the new lathe?
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