Capital budgeting and uncertainty Jane Eby, the chief financial officer of Baden Discount Enterprises, is faced with choosing between two machines. A new machine is needed to replace an existing machine that makes plastic mop handles for one of the company's most popular products. Jane is not sure about the demand for these mops, but estimates that it would not be less than 20,000 units per year or more than 30,000 units per year for the next five years.

The two machines are the semiautomatic and the automatic, respectively. Rela¬ tive to the semiautomatic machine, the automatic machine makes the handles more quickly and makes fewer mistakes that require rework. Thus, the total cost per unit for materials and labor for mop handles made by the automatic and semiautomatic machines is not the same. The total unit cost of material and labor for mop handles is $6 on the automatic machine and $8 on the semiautomatic machine.

The automatic and semiautomatic machines cost $500,000 and $300,000, respectively, and both would last five years. After five years of use, either ma¬ chine could be scrapped for a zero salvage value. This organization has a cost of capital of 12%. (Ignore the effect of taxes when answering this question.)

How should Jane choose between the two machines in this situation? Be specific. You do not have to make a specific decision about one machine or the other, but your recommendation should tell her exactly how she should make the decision.

(LO 1)