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ABC Company is considering the purchase of a numerical-controlled machine for use in its production

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Question;ABC Company is considering the purchase of a numerical-controlled machine for use inits production. The machine would cost $675,000. An additional $487,500 would berequired for installation cost and for software. Management believes that the automatedmachine 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 properadjustment. 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 anestimated scrap value of $157,500. The new machine would replace an old machine thatcan be sold now for its scrap value of $52,500. ABC Company requires a return of atleast 16% on investment of this type.1. Compute the net annual cash cost savings promised by the new machine excludeddepreciation and the overhaul at the end of year 52. Using the data from part 1 and other data from the problem, using the tables ofpresent values provided and ignoring income tax issues, compute the newmachine?s net present value. Use the incremental-cost approach3. Assume that management can identify several intangible benefits associated withthe new machine, included greater flexibility in production, improved quality inoutput and reduced throughout time. What dollar value per year wouldmanagement have to attach to these intangible benefits in order to make the newmachine an acceptable investment?4. Now, instead of intangible benefits, assume that management is told that the newmachine 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#42840 | Written in 18-Jul-2015

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