The Norman Corporation of Cerritos, CA, maker of a famous electronic component, is considering replacing one of its current hand-operated assembly machines with a new fully automated machine. This replacement would mean the elimination of one employee, generating salary and benefit savings.
Keep: One full-time machine operator -salary and benefits, $25,000 per yearCost of maintenance -$2000 per yearCost of defects -$6000Original depreciable value of old Machine -$50,000Annual depreciation -$5000 per yearExpected life -10yearsAge -5 years oldNo expected salvage value in 5 yearsCurrent salvage value -$5000Tax rate -34 percent.
Replace: Cost of new machine -$60,000Installation fee -$3000Transportation charge -$3000Cost of maintenance -$3000 per yearCost of defects -$3000 per yearExpected life -5 yearsSalvage value -$20,000Depreciation method by straight-line.
1. Given the following information, determine the cash flows associated with this replacement.
2. Assume an after-tax cost of capital of 14 percent, compute:(a) Payback period(b) Internal rate of return(c) Net present value Should the new machine be bought?