“I’m not sure we should lay out $315,000 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 $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 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 $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, I’m sure the return would be greater than our 14% required rate of return.” “I’m 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 we’ll talk about them at the executive committee meeting tomorrow.” Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.  Required:1. Compute the annual net cost savings promised by the automated welding machine.   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 machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)   Now123456Cost of machine       Software and installation       Salvage value of old equipment       Annual net cost savings       Replacement of parts       Salvage value of new machine       Total cash flows       Discount factor (14%)       Present value       Net present value       2b. Would you recommend purchasing the automated welding machine? Yes No 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 dollar value per year would management have to attach to these intangible benefits in order to make the new welding machine an acceptable investment? (Enter all amounts as positive values. Round discount factor(s) to 3 decimal places.)  Intangible BenefitsChoose Numerator:/Choose Denominator:=Intangible Benefits / =Intangible benefits / =

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Asked Jul 22, 2019
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“I’m not sure we should lay out $315,000 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 $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 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 $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, I’m sure the return would be greater than our 14% required rate of return.”

 

“I’m 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 we’ll talk about them at the executive committee meeting tomorrow.”

 

Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables.

  

Required:

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

 
 
 
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 machine’s net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

 
 
  Now 1 2 3 4 5 6
Cost of machine              
Software and installation              
Salvage value of old equipment              
Annual net cost savings              
Replacement of parts              
Salvage value of new machine              
Total cash flows              
Discount factor (14%)              
Present value              
Net present value            

 

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

  Yes
  No

 

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 dollar value per year would management have to attach to these intangible benefits in order to make the new welding machine an acceptable investment? (Enter all amounts as positive values. Round discount factor(s) to 3 decimal places.)

 
 
Intangible Benefits
Choose Numerator: / Choose Denominator: = Intangible Benefits
  /   = Intangible benefits
  /   =  

 

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Expert Answer

Step 1

Since we only answer up to 3 sub-parts, we’ll answer the parts 1, 2a and 2b of this question. Please resubmit the question and specify the other subparts (up to 3) you’d like to get answered.

Step 2

1.When expenses of a company decrease because of some changes in plans or policies, company saves some amount of cash and that amount is known as cost saving.

Net cost savings are calculated by adding up all the cost reductions and then by subtracting any increase in cost from the total.

Step 3

With the given figures, net cost sa...

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Particulars Amount (in S) 117,000 7,800 Reduction in cost of labor Reduction in cost of material 124,800 (51,600) 73,200 Total Less: Increase in maintenance cost Net cost savings

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