Question 1 8 marks 13 minutes

Bernadette Inc. makes bacterial cultures for biology research experiments. She makes each batch by hand which takes a long time. She is thinking of buying a piece of equipment for $80,000 to automate her production and increase her sales. If she buys the machine, she will be able to increase her annual sales by $100,000 per year. The variable product costs associated with these extra sales will amount to $60,000 per year. The machine will require occasional maintenance which will cost $5,000 per year. At the end of the useful life of the equipment (in 10 years time), Bernadette will be able to sell the machine for $20,000.

Bernadette Inc. uses an interest rate of 4% in capital budgeting decision making.

Required:

1. What is the net present value of buying the equipment?
2. Should Bernadette buy the equipment? Why or why not?