Reference no: EM13375617

Basil Robekins has an idea for a new type of ice cream cone made from candy bars (like Butterfinger, etc.). He thinks his normal customers will buy more often because they can pick and choose from over 31 different candy bars and won't get bored with the selection of either a sugar or a waffle cone. However, he will need to upgrade to a more flexible cone maker that can adjust to the different hardness of each type of candy bar. He has located such a cone maker for a cost of $40,000. He knows this will be a big risk for him and remembers how his brother-in-law got burned buying a $20,000 tunnel oven for "super-duper long" pizzas. Basil thinks he can get 5 years out of the flexible cone maker. But he knows that is what his brother-in-law thought about the tunnel oven which lasted only 3 years. Basil also knows that nobody will want his flexible cone maker because the corn syrup in most candy bars leaves a really ugly stain on the metal. However, he knows a scrap metal dealer who will haul away any equipment for free. He has done some market research, mostly surveying his customers and figures he can increase his annual sales by 27%. This would translate into an extra profit of $12,000 per year. Using the suggested risk-adjusted interest rates below, advise Basil as to whether he should or should not purchase the flexible cone maker. 

Rate (%) Applies to:
6 Equipment replacement 
8 New equipment
10 New product in normal market
12 New product in related market
16 New product in new market
20 New product in foreign market

Suggestion: Decide which interest rate applies here and compare it with the rate of return of the investment.