Rainbow Products is considering the purchase of a paint-making machine to reduce labor costs. The savings are expected to result in additional cash flows to Rainbow of $5000 per year. The machine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost of capital for such an investment is 12%

Question:

For $500 per year additional expenditure, Rainbow can get a "good as new" service contract that essentially keeps the machine in new condition forever. Net of the cost of the service contract, the machine would then produce cash flows of $4,500 per year in perpetuity. Should Rainbow purchase the machine with the service contract?

Use the financial calculation method