American Industrial Machines, Inc. (AIM) supplies hard to find components and replacement parts for industrial machinery such

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Question:

American Industrial Machines, Inc. (AIM) supplies hard to find components and replacement parts for industrial machinery such as the Brown & Sharpe Multi-Spindle Screw Machine that is no longer in production. AIM is considering purchasing an additive manufacturing system from for quick fabrication of custom replacement components. AIM’s engineering product team has assessed the initial hardware requirements and installation needs and provided the following information to the management team.

 The additive manufacturing system will cost $237,500.

 Installation and mounting equipment will cost $12,700.

 Expected life of the system is 6 years. Estimated salvage value at the end of this time is $38,100.

 AIM will purchase an annual maintenance contract from Brown & Sharpe. The contract will cost $45,700.

 The operating system is sold separately. The purchase cost is $19,000. AIM will contract with a local programming consultant to customize the software. This will cost $25,400 and will be expensed in the first tax year.

 Parts will be fabricated from a powdered metal material. Material costs $400 per pound. AIM estimates that they will use 450 pounds of material per year.

 Equipment is depreciated according to a 7 year MACRS schedule

 Implementing the system will have several positive benefits for AIM. They will realize savings from reduced processing time ($398,800 per year) and reduced material waste ($44,450 per year)

AIM’s expected marginal tax rate for the next six years will be 39% and their MARR is 18%.

(a)Consider this scenario: AIM pays for the entire purchase with cash reserves. Find the after cash flows over the life of the investment. Compute net present worth for this scenario.

(b) Consider this alternative scenario: AIM chooses to finance the cost of the system and mounting equipment and pays the remaining costs with cash reserves. Determine the new net after tax cash flows for this scenario and compute the net present worth.

(c) Consider this final scenario: Rather than buying the equipment, Brown & Sharpe also leases their additive manufacturing equipment. Annual leasing costs are $79,450, payable at the beginning of the year. Determine the net present worth for this scenario.

(d) Which of these three options is the best alternative for AIM?