Question

"I'm not sure we should lay out $285,000 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 $81,000 for software and installation, and another $3,700 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $44,000 more at the end of three years to replace worn-out parts." 1 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 $111,000 per year. And we would save another $7,200 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 $15,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $27,000 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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Answer 1

Below analysis based on derived Net present Value ( NPV) to acquire and install Automated Machine . After analysis of cost savings and new purchase of asset and applying discount factor of 14% ,,, We finally noticed that NPV is showing Negative So company should not buy new machine .  

Key point to highlight	Amnt($)
Automated Wekding machine- cost	2,85,000
Add - Software and Installation cost	81,000
Maintain cost per month	3,700
Maintain cost yearly (3700*12)	44,400
End of three year replacement cost	44,000
Scrap value of Old machine	15,500
Salvage value at 6 year	27,000
Saving in cost
The above machine will save six welders	1,11,000
cost
Reduction in Material cost	7,200
Add- Maintain cost per year	-44,400
Net Cost Savings	73,800
	Now $	Year 1$	Year 2 $	Year 3 $	Year 4 $	Year 5 $	Year 6 $
Cost of Machine - cash outflow	-2,85,000
Software and Installation - Cash outflow	-81,000
Salvage value of old Equipment	15,500
Annual net cost savings - Cash inflow		73,800	73,800	73,800	73,800	73,800	73,800
Replacement of parts				-44,000
Salvage value of new Machine							27,000
Total cash flow-A	-3,50,500	73,800	73,800	29,800	73,800	73,800	1,00,800
Discount factor 14%-B	1	0.88	0.77	0.67	0.59	0.52	0.46
Present value (A*B)	-3,50,500	64,737	56,787	20,114	43,696	38,329	45,923
Net present Value	-80,914
Discount factor 14%	1	1/1.14	Year1/1.14	Year2/1.14	Year3/1.14	Year4/1.14	Year5/1.14