"I'm not sure we should lay out $265,000 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 $78,000 for software and installation, and another $40,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $41,000 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 $108,000 per year. And we would save another $6,900 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 $14,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $24,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow."
"I'm not sure we should lay out $265,000 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 $78,000 for software and installation, and another $40,800 per year just to maintain the thing. In addition, the manufacturer admits it would cost $41,000 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 $108,000 per year. And we would save another $6,900 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 $14,000 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $24,000 for parts. But have your people work up the figures and we'll talk about them at the executive committee meeting tomorrow."
Chapter19: Pricing Concepts
Section: Chapter Questions
Problem 6DRQ
Related questions
Question
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Transcribed Image Text:"I'm not sure we should lay out $265,000 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 $78,000 for software and installation, and another $40,800 per year just to
maintain the thing. In addition, the manufacturer admits it would cost $41,000 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 $108,000 per year. And we would save another $6,900 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 $14,000 scrap value out of our old welding equipment if we sell it now,
and in six years the new machine will only be worth $24,000 for parts. But have your people work up the figures and we'll talk about
them at the executive committee meeting tomorrow."
Transcribed Image Text:Compute the annual net cost savings promised by the automated welding machine.
Annual net cost savings
Using the data from (1) above and other data from the problem, compute the automated welding machine's net present
value. (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)
Net present value
Would you recommend purchasing the automated welding machine?
OYes
ONo
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? (Round your final answer to the nearest whole dollar
amount.)
Show less A
Minimum dollar value of intangible benefits
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