Question

“I’m not sure we should lay out $365,000 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 $97,000 for software and installation, and another $5,300 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $60,000 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 $127,000 per year. And we would save another $8,800 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 15% required rate of return.”

“I’m still not convinced,” countered Mr. Alder. “We can only get $23,500 scrap value out of our old welding equipment if we sell it now, and in six years the new machine will only be worth $43,000 for parts. But have your people work up the figures and we’ll talk about them at the executive committee meeting tomorrow.” 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 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? (Use the appropriate table to determine the discount factor(s).) ntangible Benefits Choose Numerator: Choose Denominator: Intangible Benefits Negative net present value to be offset Present value factor Intangible benefits 186.128

Answer 1

Required rate of return = 15%

Useful life of the welding equipment = 6 years

Therefore,

The present value factor to be used as the denominator will be the present value of an annuity of $1 at 15% per period for 6 periods.

Present value factor = PVIFA (15%, 6) = 3.7845

The given table can be represented as follows: