Capital budgeting
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I need help with the following issues: how to calculate the net present value and the dollar value per year attach to the intangible benefits?
"I am not sure we should lay out $500,000 for that automated welding machine", said JA president of SEC. "That's a lot of money, and it would cost us $80,000 for software and installation, and another $3,000 every month just to maintain the thing. In addition, the manufacturer admits that it would cost $45,000 more at the end of the seven years to replace the worn-out parts."
The machine would replace six welders at a cost savings of $108,000 per year and it would save another $6,500 per year in reduced material waste. The new automated welder will last for 12 years. The required rate of return for the company is 16%
The old welding equipment scrap value is $12,000 if is sold now, and in 12 years the new machine will only be worth $20,000 for parts.
1. Compute the net annual cost savings promised by the automated welding machine.
2. Using the data from (1) above and the other data from the problem, compute the automated welding machine's net present value. Use the incremental-cost approach. Would you recommend purchasing the automated welding machine? Explain.
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?
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Solution Summary
The solution explains how to calculate the cash flows for the project and determine the net present value.
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