Burger Botanicals produces a wide range of herbal supplements sold nationwide th
ID: 2475716 • Letter: B
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 $10.55 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. Click here to view the factor table. (a) Calculate the net present value of the new packaging machine. Assume that Burger Botanicals uses a 9% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number for e.g. -59,991 or parentheses e.g. (59,991).) Net present value $ (b) Do you recommend that Burger Botanicals purchase the new machine? (c) Assume that Burger has adopted a new 12% discount rate. Calculate the net present value of the new packaging machine. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 2 decimal place, e.g. 58,971.75. Enter negative amount using a negative sign preceding the number for e.g. -59,991 or parentheses e.g. (59,991).) Net present value $ Do you recommend that Burger Botanicals purchase the new machine?
Explanation / Answer
Initial Investment = New Machine Cost + Installation Cost - Sale value of current machine
Initial Investment = 165050+3050 - 12475
Initial Investment = 155625
salvage value = 4045
Annual Saving in variable cost to operate =( current machine’s variable cost - variable cost to operate the new machine)* No of Cartoon in a year
Annual Saving in variable cost to operate = (10.55-10.45)*248000
Annual Saving in variable cost to operate = 24800
Saving in overhaul cost in 3year = 10425
a)
Net present value = -Initial Investment + Annual Saving in variable cost to operate*PVIFA(9%,10) + Saving in overhaul cost in 3year *PVIF(9%,3) + salvage value *PVIF(9%,10)
Net present value = -155625 + 24800*6.4177 + 10425 *0.7722 + 4045 *0.4224
Net present value = $ 13,292.75
b)
Yes , Burger Botanicals should purchase the new machine as its NPV is postive at 9% discount rate
c)
Net present value = -Initial Investment + Annual Saving in variable cost to operate*PVIFA(12%,10) + Saving in overhaul cost in 3year *PVIF(12%,3) + salvage value *PVIF(12%,10)
Net present value = -155625 + 24800*5.6502 + 10425 *0.7118 + 4045 *0.3220
Net present value = - $ 6777.04
d)
No, Burger Botanicals should not purchase the new machine as its NPV is negative at 12% discount rate
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