Tiger Computers, Inc., of Singapore is taking the purchase of an automated etching machine for use in the production of its circuit boards. The machine could cost $910,000. An additional $660,000 could be needed for installation costs and for software. Management believes that the automated machine would give 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 could 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 could be usable for 13 years, after which it could be sold for its scrap value of $320,000. It could 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.
Determine the appropriate discount factor using tables.
Required:
1. Evaluate the annual net cost savings promised by the new etching machine. (Omit the "tiny_mce_markerquot; sign in your response.)
2a.
Using the data from need and other data from the problem, evaluate the new machine's net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)
Net present value $
2b. Could you recommend that the machine be purchased?
3.
Consider that management will 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 could management have to attach to these intangible benefits in order to prepare the new etching machine an acceptable investment?