Problem 5 1, The net annual cost savings is computed as follows: Reduction in labor costs 240,000, Reduction in material costs, 96,000 Total c0st redUCONS enn 336,000 Less increased maintenance costs (P4,250 x 12) 51,000 Net annual cost savings. 285,000, 2. Using this cost savings figure, and other data provided in the text, the net present value analysis i: “Amount of Cash Present Valve of Yeas) Flows 16% Factor Cash Fows (Cos ofthe machine. . Now P1800,000) 11000 (900,00) Instalation and sofware. Now (650,000) 1.000 (650.000) Saluago ofthe old mach. Now 70.000 © 1.000 70000 Annual cost savings. +410 265.000 4.400 11280,790 (Overhaul equred. 6 (90,000) 0370 (3200) Salvage ofthe new machine. 10 P1000 191 40.10 Net present value (192,400) No, the etching machine should not be purchased. It has a negative net present value at an 18% discount rate The intangible benefits would have to be worth at least P42.813 per year as shown below: Required increase in net present value PI92,400 = py 615 Factor for 10 years 4494 2 Thus, the new etching machine should be purchased if management believes that the intangible benefits are worth at least P42,813 per year to the company.