Burger Botanicals produces a wide range of herbal supplements sold nationwide th

Question

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 $165,050, and installation will require an additional $3,050. The machine has a useful life of 10 years and is expected to have a salvage value of $4,045 at that time. The variable cost to operate the new machine is $10.45 per carton compared to the current machine’s variable cost of $10.54 per carton, and Burger expects to pack 248,000 cartons each year. If the new machine is purchased, Burger will avoid a required $10,425 overhaul of the current machine in three years. The current machine has a market value of $12,475.

Identify the amount and timing of all cash flows related to the acquisition of the new packaging machine.

Cash Flow Timing Amount Purchase price    $ Installation Salvage of old equipment Salvage of new equipment Variable cost savings Avoided overhaul

Explanation / Answer

Amount and timing of all cash flows related to the acquisition of the new packaging machine is shown as under:

Cash Flow Timing Amount Purchase price One time cost at beginning of year 1,65,050 Installation One time cost at beginning of year 3,050 Salvage of old equipment Beginning of first year 12,475 Salvage of new equipment End of 10th year 4,045 Variable cost savings each year 22,320 Avoided overhaul 10,425

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