The WRL Company operates a snack food centre at the Hartsfield Airport. On January 2, 2013, WRL purchased a special cookie-cutting machine, which has been used for three years. WRL is considering purchasing a newer, more efficient machine. If purchased, the new machine would be acquired today on January 2, 2016. WRL expects to sell 300,000 cookies in each of the next four years. The selling price of each cookie is expected to average $0.60.
WRL has two options: (1) continue to operate the old machine or (2) sell the old machine and purchase the new machine. The seller of the new machine offered no trade-in.
The following information has been assembled to help management decide which option is more desirable:

WRL has a 40% income tax rate and an after-tax required rate of return of 16%.
REQUIRED
1. Use the net present value method to determine whether WRL should retain the old machine or acquire the new machine.
2. How much more or less would the recurring after-tax variable cash operating savings have to be for WRL to exactly earn the 16% after-tax required rate of return? Assume all other data about the investment do not change.
3. Assume that the financial differences between the net present values of the two options are so slight that WRL is indifferent between the two proposals. Identify and discuss the non financial and qualitative factors that WRL should consider.

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Old New Machine Machine $96,000 $12,000 Initial machine investment $144,000 Terminal disposal price at the end of useful S24,000 life assumed for amortization purposes Useful life from date of acquisition Expected annual cash operating costs: 7 years 4 years S0.24 S0.168 Variable cost per cookie Total fixed costs $18,000 Straight-line $48,000 S16,800 Straight-line $144,000 Amortization method used for accounting purposes Estimated disposal prices of machines January 2, 2016 December 31, 2019 $12,000 S24,000 Capital cost allowance rate (declining balance) 25% 25%