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 $153,800, and installation will require an additional $2,800. The machine has a useful life of 10 years and is expected to have a salvage value of $4,360 at that time. The variable cost to operate the new machine is $9.10 per carton compared to the current machine’s variable cost of $9.18 per carton, and Burger expects to pack 239,000 cartons each year. If the new machine is purchased, Burger will avoid a required $9,300 overhaul of the current machine in three years. The current machine has a market value of $11,800.

Explanation / Answer

Solution:

Timing Amount Working Purchase Price Year 0 153,800 Installation Year 0 2,800 Salvage of old equipment Year 0 11,800 Salvage of new equipment Year 10 4,360 Variable cost savings Year 1 to 10 19,120 ( $ 9.18 - $ 9.10 ) * 239,000 cartons Avoided overhaul Year 1 to 3 9,300

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