Question 49

Huon Cheese wants to buy a product wrapping machine to replace several employees.

The outlay required is $300,000. 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. Huon Cheese will save $70,000 per year in employee salaries but the machine will need $5,000 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:

Number of Periods	9%	10%	11%
1	0.917	0.909	0.901
2	0.842	0.826	0.812
3	0.772	0.751	0.731
4	0.708	0.683	0.659
5	0.650	0.621	0.593

Required:

1. Compute the payback period and explain whether Huon Cheese should accept or reject the purchase of the machine.

[5 marks]

2. Calculate the net present value (NPV) of the proposed machine and state whether Huon Cheese should accept or reject the investment.

[5 marks]

3. Could there be any subjectivity in the calculation of a NPV? Explain your answer please.

[5 marks]

4. Write a paragraph explaining the non-financial costs involved in the decision to purchase the machine. (Maximum 200 words).