PART 1)
Your boss has asked you to investigate an investment in a new knitting machine technology for implementation at your facility. The accounting department has provided the following data estimates for this project:
Investment Cost of Technology = $50,000
Annual Labor Savings if implemented = $20,000
Annual Operating and Maintenance Costs of Technology = $7,500
Salvage Value of Technology after project life = $10,000
Project Life = 6 years
Specifically she is asking for the following:
(a) She wants you to draw an accurate cash flow diagram of this project from the perspective of the firm.
(b) She wants you to calculate the Present Worth of this investment, using a discounting rate=10%.
(c) She wants you to offer a recommendation on whether the new technology should be purchased and implemented and provide a justification.
(d) The accounting department has indicated to her that they do not feel confident on the estimate of the Annual Labor Savings. Your boss wants to know the maximum percentage (%) that this variable can decrease by without changing your recommendation. Provide your answer to her in a sentence
PART 2)
In Problem #6 above what is the Simple Payback Period of this investment?
(a) If your firm uses a Payback Period Guideline Period of 3 years, provide in a sentence for a recommendation and justification to your boss.
(b) If the technology supplier offered you a discount price from the one previously quoted to the accounting department. From the supplier’s perspective, what is the maximum price that they can charge you for the technology that you will pay (in other words the technology is justified using the simple Payback Period method)? How much of a savings would this new price represent?