You make up the board of Directors for Joe Manufacturing Company. Up for consideration is the purchase of a new widget maker. The machine cost $280,000 and has an expected useful life of 6 years with a salvage value of $10,000. The machine is expected to produce 30% more widgets with no more fixed expense incurred and variable expense are $.10 per widget more. Being a JIT manufacturing company there is no inventory held. The sales department believes they can sell 15% to 18% more widgets this next year and continue those same sales numbers with long term contracts for each of the 6 years, no other raw maternal sales increases expected in the next 6 years. The machine will require a one-time maintenance of $50,000 in year 4. The company would like to see a rate of return of at least 12% if the machine is purchased. Sales this year were 250,000 widgets at $2.00 each. The treasury group has informed you that they can nearly guarantee a 14.5% return if the money was invested under their control. The cost center owner has a strict budget for variable expense at $3,500 annually that he would like to stay at or below. The business development manager is confident that the 18% increase in sales can be met with little to no problem base on his teams analysist of current market conditions as well as competitors performance.

Ignoring taxes, based on NPV should the machine be purchased? Show your work and support your recommendation.

With your same numbers used for answer 1 estimate your IRR.

How many widgets did base your decision on, and why?

What hurtle rate did you use and why?