Kate's Candy Co. makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Steve Bishop, the production manager at this facility, installed a packaging machine last year at a cost of $500,000. This machine is expected to last for 9 more years with no residual value. Operating costs for the projected levels of production, before depreciation, are $100,000 annually.

Steve has just learned of a new packaging machine that would work much more efficiently in the production line. This machine would cost $580,000. installed, but the annual operating costs would be only $40,000 before depreciation. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $250,000.

Steve has worked for Kate's Candy for seven years. He plans to remain with the firm for about two more years, when he expects to become a vice president of operations at his father-in-law's company.

Kate's Candy pays Steve a fixed salary with an annual bonus of 5% of net income for the year. Assume that Kate's Candy uses straight-line depreciation and has a 10% required rate of return. Ignore income-tax effects.

Required

1. As the owner of Kate's Candy, would you want Steve to keep the current machine or purchase the new one?

2. Why might Steve not prefer to make the decision desired by the owner of Kate's Candy?