Module 8 / Chapter 7 Capital Budgeting i 03 Saved "I'm not sure we should lay out $295,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. "That's a lot of money, and it would cost us $83,000 for software and installation, and another $46,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $46,000 more at the end of three years to replace worn-out parts." "I admit it's a lot of money," said Franci Rogers, the controller. "But you know the turnover problem we've had with the welding crew. This machine would replace six welders at a cost savings of $113,000 per year. And we would save another $7,400 per year in reduced material waste. When you figure that the automated welder would last for six years, I'm sure the return would be greater than our 19% required rate of return." ^ "I'm still not convinced," countered Mr. Alder. "We can only get $16,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $29,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow." Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables. Prev Help Save & Exit 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 machine's net present value. 2b. Would you recommend purchasing the automated welding machine? 3. Assume that 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 in order to make the new welding machine an acceptable investment? Submit 1 of 4 BEN Next

"I'm not sure we should lay out $295,000 for that automated welding machine," said Jim Alder, president of the Superior Equipment Company. That's a lot of money, and it would cost us $83,000 for software and installation, and another $46,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $46,000 more at the end of three years to feplace viom-out parts." "I admit it's a lot of money," said Franci Rogers, the controller. "But you know the turnover problem we've had with the weiding crew. This machine would replace six welders at a cost savings of $113,000 per year. And we would save another $7,400 per year in reduced. material waste. When you figure that the automated welder would last for six years, I"m sure the return would be greater than our 19% required rate of return" "Trm stili not convinced," countered Mr. Alder. "We can only get $16,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $29,000 for parts. But have your people work up the figures and we il talk about them at the executive committee meeting tomotrow" Click here to view Exhibit 78-1 and Exhibit 78.2. to determine the oppropriate discount factor(s) using tablet Required: 1 Compute the annual net cost savings promised by the automated weiding machine. 2a. Using the data from Required 1 and other data from the problem, compute the automated weiding mochines net present value 2b. Would you recommend purchasing the automated welding machine? 3. Assume that management can identify several intangible benefits associated with the automoted weiding indachine, including greater flexibility in shifting from one type of product to another, improved quatity of output, and faster delivery as a result of feduced throughput time. What minimum dollar value per year would management have to attech to these intanglble benefits in order to inalie the new welding machine an occeptable investment