Please describe the circumstances of the following case study and recommend a course of action. Explain your approach to the problem, perform relevant calculations and analysis, and formulate a recommendation. Ensure your work and recommendation are thoroughly supported.

Case Study:

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below:

  

• $65,000 for equipment with useful life of 7 years and no salvage value.                                                     
• Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate.                            
• Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000 per year for the remaining years.                     
• Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
-	75,000	100,000	125,000	150,000	150,000	150,000

Option 2 

• $85,000 for equipment with useful life of 7 years and a $13,000 salvage value
• Maintenance costs are expected to be $3,500 per year and increase by 3% in Year 6 and remain at that rate.
• Materials in Year 1 are estimated to be $20,000 but remain constant at $15,000 per year for the remaining years.
• Labor is estimated to start at $60,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
-	80,000	95,000	130,000	140,000	150,000	160,000

The company’s required rate of return and cost of capital is 8%.

Management has turned to its finance and accounting department to perform analyses and make a recommendation on which option to choose. They have requested that the three main capital budgeting calculations be done: NPV, IRR, and Payback Period for each option.