Question:

Tiger Computers, Inc., of Singapore is considering the purchase of an automated etching machine for use in the production of its circuit boards. The machine could cost $910,000. (All currency amounts are in Singapore dollars.) An additional $660,000 would be needed for installation costs and for software. Management believes that the automated machine could provide substantial annual reductions in costs, as given below:

Annual Reduction

in Costs

Labor costs         $              220,000

Material costs    $              95,500

The new machine would need considerable maintenance work to keep it properly adjusted. The company's engineers evaluate that maintenance costs would increase by $6,500 per month if the machine were purchased. In addition, the machine would need a $89,000 overhaul at the end of the ninth year.

The new etching machine would be usable for 13 years, after which it would be sold for its scrap value of $320,000. It would replace an old etching machine that will be sold now for its scrap value of $89,000. Tiger Computers, Inc., needs a return of at least 19% on investments of this type. (Ignore income taxes.)

Determine the appropriate discount factor(s) using tables.

Required:

1.           

Evaluate the annual net cost savings promised by the new etching machine. (Omit the "$" sign in your response.)

Annual net cost savings $

2a.         

Using the data from requirement (1) and other data from the problem, evaluate the new machine's net present value. (Use the incremental-cost approach.) (Negative amount should be shown by a minus sign. Round discount factor(s) to 3 decimal places, shown and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value           $

2b.

Would you recommend that the machine be purchased?

No

Yes

3.           

Consider that management can identify various intangible benefits related with the new machine, including greater flexibility in shifting from one type of circuit board 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 etching machine an acceptable investment?