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To analysis:
Whether to purchase the automated welding machine or not.
Answer to Problem 20P
Solution:
No, it is not advisable to purchase the automated welding machine.
Explanation of Solution
On the basis of
The net present value of the automated machine will be calculated as under −
The present value of
Given,
- Cost of machine = $ 250,000
- Software and installation = $ 80,000
- Salvage value of old machine = $ 12,000
- Replacement parts cost in year 3 = $ 45,000
| Total Present value of |
||
| Cost of machine | 250,000 | |
| Software and installation | 80,000 | |
| Less: Salvage value of old machine | -12,000 | |
| Present value of replacement of parts | ||
| Replacement parts cost | 45,000 | |
| PVIF @ 16 % for 4 year | 0.552 | 24,840 |
| Total Present value of cash out flows | 342,840 |
The total present value of cash outflows = $ 342,840.
Now, the present value of cash inflows will be calculated as −
Given,
- Annual net savings from year 1 to 6 = $ 78,500
- Salvage value of new machine at the year of year 6 = $ 20,000
| Total present value of Cash Inflows | |||
| Year | PVIF @ 16 % (2) | Present value of |
|
| 1 to 6 | Annual net savings = $ 78,500 | 3.685 | 289,272.50 |
| 6 | Salvage value = $ 20,000 | 0.410 | 8,200 |
| Total present value of Cash Inflows | 297,472.50 |
The present value of cash inflows = $ 297,472.50.
Now, the net present value of automated welding machine will be calculated as under −
Given,
Net present value = Total present value of cash inflows − Total present value of cash outflowsNet present value = $ 297,472.50. − $ 342,840Net present value = - $ 45,367.50
The net present value is = - $ 45,367.50 i.e., negative, so it is not advisable to purchase the automated welding machine.
Note: PVIF values are taken from the charts provided.
Thus, it is not advisable to purchase the automated welding machine.
Requirement 3
To compute:
Minimum dollar value per year to make the new welding machine as acceptable investment.
Answer to Problem 20P
Solution:
Minimum dollar value per year to make the new welding machine as acceptable investment = $ 12,311.40
Explanation of Solution
The minimum dollar value per year to make new welding machine as acceptable investment will be calculated as under −
Given,
- Net present Value of welding machine = - $ 45,367.50
- PVAF @ 16 % for 6 years = $ 3.6853
Minimum dollar value per year = Net present Value of welding machine PVAF @ 16 % for 6 yearsMinimum dollar value per year = $ 45,367.50 3.685Minimum dollar value per year =$12,311.40
The machine should provide at least a benefit of $ 12,311.40 per year to make it acceptable.
Thus, the minimum dollar value per year to make the new welding machine as acceptable investment has been calculated.
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