Reference no: EM131549012

ATL Company operates a snack-food center at Hartsfield Airport. On January 1, 2005 they purchased a special cookie cutting machine which has been used for three years. They are considering purchasing a newer, more efficient machine. If purchased, the new machine would be acquired today, January 1, 2008. They expect to sell 300,000 cookies in each of the next four years. The selling price of each cookie is expected to be $0.50. The old machine is expected to be useful for four more years. ATL has two options: (1) Continue to operate the old machine, or (2) sell the old machine and purchase the new machine. The seller of the new machine offered no trade-in. The following information has been assembled to help management decide which option is more desirable: Old New Initial purchase cost of machine $ 80,000 $ 120,000 Terminal disposal price initially assumed for depreciation purposes $10,000 $20,000 Useful life expected at date of acquisition 7 years 4 years Expected annual cash operating costs: Variable costs per cookie $0.20 $0.14 Fixed costs per year $ 15,000 $ 14,000 Current estimated disposal prices: January 1, 2008 $ 40,000 $ 120,000 December 31, 2011 $ 7,000 $ 20,000 ATL is subject to a 40% income tax rate and they require an after-tax required rate of return of 16%. Use the NPV method to determine whether ATL should keep the old machine or buy the new one. How much more or less would the recurring after-tax cash operating savings have to be for ATL to exactly earn the 16% after-tax required rate of return? Assume that he financial differences between the NPVs of the two options are so slight that ATL is indifferent between the two proposals. Identify and discuss other factors that they should consider in making the decision.