Gustav is facing a new financial decision. His old grinding and blending equipment is showing its age and requires more frequent shutdowns. He consulted with the local maintenance team, and they suggested that the equipment can be reinvigorated. At the same time, Gustav is thinking that a new machine can improve the companys productivity, reduce maintenance costs, and decrease idle time. Here is the information Gustav has gathered so far.

The old grinding equipment

o It has a book value of $35,000.

o Gustav already found a buyer for it; the selling price is $35,000.

o The annual depreciation is $6,000.

o At the end of 5 years, the machine can be sold for $5,000.

o The annual maintenance is $8,000 per year.

o it requires $30,000 to be spent immediately and another additional major maintenance of $6,000 in year 3.

The new grinding equipment

o It costs $140,000.

o It can be depreciated over 10 years using a straight-line depreciation.

o The annual maintenance starts at $3,000 per year and increases by $ 1500 per year.

o Can be sold after 5 years for $60,000 o It will save $10,000, $10,500, $10,750, $11,000, and $11,250 in labor costs in years 1, 2, 3, 4, and 5.

o It will increase sales by $7,000 per year.

Gustav calculated his own cost of capital (discount rate), and it is 12%. The tax rate for his business is 30%.

First, you must find the FCFs.

a) Using the NPV analysis, advise Gustav whether he should purchase the new machine.

b) Using the IRR analysis, advise Gustav whether he should purchase the new machine. Do you reach the same conclusion?

c) Are there any other factors Gustav should consider when making his decision? Think about strategic, qualitative, and other non-financial factors. Find at least 3.

d) You already know that Gustav wants a thorough investigation. Therefore, he wants to conduct these additional analyses. Use only the NPV method for this part. What if - The new machine can be sold for $80,000 in 5 years.