A company is to make the decision on whether or not to buy a machine to package its product and has asked you to review the information and give them with answers to some questions. The machine will cost $200,000. It is wanted to pay it off completely after four year (four annual ends of year payments). The Supplier has offered to finance machine at 4.35%. The machine has the life span of six years and will have insignificant salvage value. Maintenance costs are as follows: Years 1 and 2 $7,500 for each year. Years 3 and 4 $10,000 per year. Years 5 & 6 $15,000 per year. Operational costs will start at the $18,000 per year and rise by 2% per year (compounded). Savings from packaging machine are approximated to be $0.40 per package with the annual volume estimated between the high of 200,000 and low of 150,000. Do a year-by-year analysis and answer the following questions. The Company had many other projects planned which will provide a MARR of 10%.
a) Will the machine cost the company money or create the company money in first 2 years supposing the high estimate of production? How much?
b) At the end of 4 years will the machine have made or lost the company money? How much? (Compute for both best and worst case scenarios).
c) What is the profit or loss for machine over its lifetime supposing a best-case scenario? Supposing a worst-case scenario?
d) What is minimum production level required to make the purchase feasible (breakeven)? To make it past the MARR?
e) If the saving on machine drops to $0.35 per package what occurs to our numbers?
f) Based upon the information accessible would you suggest purchase of this machine? Describe your reasoning.