Problem 11-16A Net Present Value Analysis [LO11-2]

Im not sure we should lay out $315,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot of money, and it would cost us $87,000 for software and installation, and another $4,300 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $50,000 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 $117,000 per year. And we would save another $7,800 per year in reduced material waste. When you figure that the automated welder would last for six years, Im sure the return would be greater than our 14% required rate of return.

Im still not convinced, countered Mr. Alder. We can only get $18,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $33,000 for parts. But have your people work up the figures and well talk about them at the executive committee meeting tomorrow."

reduction in labor costs
reduction in material waste
total
less increased maintenance costs
annual net cost savings

2a.	Using the data from (1) above and other data from the problem, compute the automated welding machines net present value. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

	now	1	2	3	4	5	6
cost of new machine
software and installation
salvage value of old equipment
annual net cost savings
replacement of old parts
salvage value od new machine
total cash flows
discount factor (14%)
present value
net present value

2b.

Would you recommend purchasing the automated welding machine?

	Yes
	No