Should Marshall purchase the thermowell machine? In calculating the WACC, use 6% as the equity risk premium.

The thermowell was a major part of the RTD. There were many advantages to installing a thermowell with the sensor. First, in providing a physical barrier between the production process and the sensing element, the thermowell protected production from corrosive processes, extremely high temperatures, and high pressure. Second, it allowed the RTD to be removed and serviced without interfering with the production process. Because the temperature had to travel through the metal of the thermowell before reaching the RTD, however, the RTD sensors response time was reduced. The thermowells quality and design thus affected the RTDs quality. Most thermowells were made from carbon steel, stainless steel, nickel, and brass. Other chemical compounds such as silicon carbide and silicon nitride were sometimes used to produce thermowells. The cost of thermowells was a major component of the production cost of sensors. Burtons thermowell equipment allowed it to fulfill only half of its production needs, so the company had to purchase the rest of the equipment from other manufacturers. During 2016, Burton spent $1.4 million to purchase thermowells.

Marshall contacted a large thermowell machinery manufacturer and learned that a purchase of four new thermowell machines for $600,000 would have enabled Burton to manufacture all the thermowells that it purchased in 2016. The equipment would have an economic life of seven years. Marshall

estimated that Burton would need to hire two operators to run the new machines for $170,000 annually. Costs for buying additional materials and renting warehouse space were estimated at $780,000 annually. Marshall also estimated that if Burton started manufacturing additional thermowells, its average net working capital needs would increase immediately by $650,000 due to the increase in inventory arising from in-house production. The working capital would remain at that level during the equipments life and would return to normal levels afterward.