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ABC Company_DETERMINE THE NET PRESENT VALUE

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Question;ABC Company is considering the purchase of;a numerical-controlled machine for use in its production. The machine would;cost $675,000. An additional $487,500 would be required for installation cost;and for software. Management believes that the automated machine would provide;substantial annual reductions in cash costs, as shown below.;Labor cost $180,000 (Annual reduction in;cash costs);Material costs $72,000(Annual reduction in;cash costs);The new machine would require considerable;maintenance work to keep it in proper adjustment. The company?s engineers;estimate that maintenance costs would increase by $3,200 per month if the;machine were used. In additional, the machine would require a $67,500 overhaul;at the end of the fifth year.;The new machine would be usable for eight;years, after which it would be sold for an estimated scrap value of $157,500.;The new machine would replace an old machine that can be sold now for its scrap;value of $52,500. ABC Company requires a return of at least 16% on investment;of this type.;1.;Compute the net annual cash;cost savings promised by the new machine excluded depreciation and the overhaul;at the end of year 5;2.;Using the data from part 1 and;other data from the problem, using the tables of present values provided and ignoring;income tax issues, compute the new machine?s net present value. Use the;incremental-cost approach;3.;Assume that management can;identify several intangible benefits associated with the new machine, included;greater flexibility in production, improved quality in output and reduced;throughout time. What dollar value per year would management have to attach to;these intangible benefits in order to make the new machine an acceptable;investment?;4.;Now, instead of intangible;benefits, assume that management is told that the new machine can be sold at;the end of its useful life for a much higher salvage value of $720,000. Should;management approve the investment?

 

Paper#37239 | Written in 18-Jul-2015

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