Your company is considering purchasing a new bottling machine for the line that manufactures juice products....

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Your company is considering purchasing a new bottling machinefor the line that manufactures juice products. This Swill Fill 2000is forecast to last for five years and will cost $42,000 topurchase. The new machine will offer labor savings of $4,500annually through faster changeovers and will save you $5,000 peryear in maintenance costs vs. your existing machine. The existingmachine does not exhibit unusual wear-and-tear and should be ableto go for another five years as well.
Your internal hurdle rate is 12%. Should you go forward with thepurchase?
If we assume that the machine can outlive its useful life asstated in the problem above, what is our simple payback period?What is our discounted payback period? Please build a table todemonstrate the payback period over time at least through the pointin time where the discounted payback period turns positive.

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4.2 Ratings (701 Votes)

Savings each year for 5 years 4500 5000 9500 NPV of the machine ignoring salvage value of existing machine and New machine 42000 9500012111125 775463 As the NPV is negative the new machine should not be purchased If the machine See Answer

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