Question
An auto repair shop is considering the purchase of an automated paint spraying machine. The machine costs $80,000 (payment due immediately), will last five years
An auto repair shop is considering the purchase of an automated paint spraying machine. The machine costs $80,000 (payment due immediately), will last five years and will save $2,000 in paint costs and $20,000 in labor costs (assume savings happen at the end of the year). The machine requires annual maintenance costing $1,000 each year, payable at year end. At the end of its useful life, the machine can be sold for $5,000. The companys cost of capital is 12%. Should the company buy the machine? Ignore taxes. Show supporting calculations. Example 2 Assume that the auto shop is deciding between two machines. The first (described in Example 1, above) and another (below). Following information is available for the other machine, which will also last five years: Each year $3,000 will be saved on paint It will reduce labor costs by $27,000 each year It will require maintenance costs of $4,000 each year The machine costs $90,000 The expected residual value is $7,000 The required rate of return is 12% Assume, acquisition occurs now (time period = 0), and that all other cash inflows/outflows each year occur at the end of the year. Should the company choose the first or the second machine?
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