Review the data provided in Exercise 9-2.
Burger Botanicals produces a wide range of herbal supplements sold nationwide through independent distributors. In response to an increasing demand for its products, the company is considering the purchase of a new packaging machine to replace the seven-year-old machine currently in use. The new machine will cost $150,000, and installation will require an additional $3,000. The machine has a useful life of 10 years and is expected to have a salvage value of $4,000 at that time. The variable cost to operate the new machine is $10 per carton compared to the current machine’s variable cost of $10.10 per carton, and Burger expects to pack 250,000 cartons each year. If the new machine is purchased, Burger will avoid a required $10,000 overhaul of the current machine in three years. The current machine has a market value of $12,000.
a. Calculate the net present value of the new packaging machine. Assume that Burger Botanicals uses a 10% discount rate.
b. Do you recommend that Burger Botanicals purchase the new machine? Why or why not?
c. Assume that Burger has adopted a new 14% discount rate. Do you recommend that Burger Botanicals purchase the new machine? Why or why not?