Question
Balderdash Recycling is facing a dilemma. They need to decide which of two options to work with for their new aluminum recycling facility. The first
Balderdash Recycling is facing a dilemma. They need to decide which of two options to work with for their new aluminum recycling facility. The first option will cost them $980,000 up front, but it will only last for ten years and need to be replaced. The second option is a much more robust piece of machinery and is forecast to last for 30 years, but it costs $2,000,000 to purchase and install. As they consider which machine to implement, they realize that there are other differences between the two machines. Machine 1 requires more manual labor, than machine 2, which is mostly automated. Machine 1 has $80000 per year in additional labor costs, as a result. But machine 1 also produces more aluminum that can be resold after the operation is complete than machine 2, which wastes more material. Thus, machine 1 will result in $50,000 per year in additional gain from sales. Since the company is operating under a special contract with the nation of Belgravia, they do not pay taxes.
The companys cost of capital is 12%, and they need to decide quickly which machine to buy. Show how they can decide correctly and explain which choice they should make. A spreadsheet may be a good tool to use, but if you have a different method to show the result, thats acceptable.
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