Mansion is a famous restaurant in the French Quarter of New Orleans. Bouillabaisse Sophie is Mansion’s house specialty. Management is considering the purchase of a machine that would prepare all the ingredients, mix them automatically, and cook the dish to the restaurant’s specifications. The machine will function for an estimated 12 years, and the purchase price, including installation, is $250,000. Estimated residual value is $25,000. This labor-saving device is expected to increase cash flows by an average of $42,000 per year during its estimated useful life. For capital investment decisions, the restaurant uses a 12 percent minimum rate of return. Use Tables 1 and 2 in the appendix on present value tables.

Required

1. Using the net present value method, determine if the company should purchase the machine. Support your answer.

2. If management had decided on a minimum rate of return of 14 percent, should the machine be purchased? Show all computations to support your answer.