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Question 4 Bliss Bath Salts wants to buy a product labelling machine to replace several employees. The outlay required is $250,000. The machine will be
Question 4 Bliss Bath Salts wants to buy a product labelling machine to replace several employees. The outlay required is $250,000. The machine will be useful for five years at which time the organisation will upgrade. The machine will have a $91,000 expected salvage value. Bliss Bath Salts will save $60,000 per year in employee salaries but the machine will need $7,000 of maintenance per year. The cost of capital is 10 per cent and a payback period of 5 years is expected. Use the following present value table to help calculate your answer: 9% Number of Periods 10% 11% LA WINHA 2 3 *0.917 0.842 0.772 0.708 0.650 0.909 0.826 0.751 0.683 0.621 0.901 0.812 0.731 0.659 0.593 5. Required: a. Compute the payback period and explain whether Bliss Bath Salts should accept or reject the purchase of the machine. [5 marks] b. Calculate the net present value (NPV) of the proposed machine and state whether Bliss Bath Salts should accept or reject the investment. [5 marks] C. The Manager of Bliss Bath Salts states that they are only concerned with the NPV. Explain why the manager's approach is misguided. [5 marks] d. Write a paragraph explaining the non-financial costs involved in the decision to purchase the machine. (Maximum 200 words). [5marks] [Total for Question 4 = 20 marks]
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