Your Best Toys Company makes toys at a plant in Edmonton, Alberta. Craig Scott, the production manager, installed a packaging machine used for last year at a cost of $520,000. This machine is expected to last for 10 more years with no residual value. Operating costs for the projected levels of production, before depreciation, are $104,000 annually.

Craig has just learned of a new packaging machine that would work much more efficiently in the production line. This machine would cost $603,200 installed, but the annual operating costs would be only $41,600 before depreciation. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $260,000.

Craig has worked for the company for 7 years. He plans to remain with the firm for about 2 more years, when he expects to become a vice president of operations at his father-in- laws company. Your Best Toys pays Craig a fixed salary with an annual bonus of 5% of net income for the year.

Assume that the company uses straight-line depreciation and has a 10% required rate of return.

Required:

1. What is the estimated net present value of purchasing the new machine? Would you recommend buying it?

2. How much would Craigs compensation be increased or decreased by the investment? What do you think, will he invest in a new equipment after he learns about the effect of this purchase on his compensation? Ignore the time-value of money (do not discount future cash flows back to a present value).

Appreciate your help thank you :)