Problem 8–19 (30 minutes)
1. The annual net cost savings is computed as follows:
Reduction in labor costs ………………………………..
$240,000
Reduction in material costs …………………………...
96,000
Total cost reductions ……………………………………
336,000
Less increased maintenance costs ($4,250 × 12) .
51,000
Annual net cost savings ………………………………..
$285,000
Year(s)
Amount of
Cash
Flows
18%
Factor
Present
Value of
Cash Flows
Cost of the machine …………
Now
$(900,000)
1.000
$ (900,000)
Installation and software …..
Now
$(650,000)
1.000
(650,000)
Salvage of the old machine ..
Now
$70,000
1.000
70,000
Annual cost savings ………….
1-10
$285,000
4.494
1,280,790
Overhaul required ……………
6
$(90,000)
0.370
(33,300)
Salvage of the new
machine ………………………
10
$210,000
0.191
40,110
Net present value …………….
$ (192,400)
No, the etching machine should not be purchased. Its net present value
is negative.
3. The intangible benefits would have to be worth at least $42,813 per
year as shown below:
Required increase in net present value $192,400
