Im not sure we should lay out $360,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. It would cost us $96,000 for software and installation, and another $62,400 per year just to maintain. In addition, the manufacturer admits it would cost $59,000 more at the end of three years to replace worn-out parts.

I admit its a lot of money, said Franci Rogers, the controller. But you know the turnover problem weve had with the welding crew. This machine would replace six welders at a cost savings of $126,000 per year. And we would save another $8,700 per year in reduced material waste. When you figure the automated welder would last six years, Im sure the return would be greater than our 17% required rate of return.

Im still not convinced, countered Mr. Alder. We can only get $23,000 scrap value for our old welding equipment if we sell it now, and in six years the new machine will only be worth $42,000 for parts.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the annual net cost savings promised by the automated welding machine.

2a. Using the data from Required 1 and other data from the problem, compute the automated welding machines net present value.

2b. Would you recommend purchasing the automated welding machine?

3. Assume management can identify several intangible benefits associated with the automated welding machine, including greater flexibility in shifting from one type of product to another, improved quality of output, and faster delivery as a result of reduced throughput time. What minimum dollar value per year would management have to attach to these intangible benefits to make the new welding machine an acceptable investment?