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Should the company purchase the new equipment

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Question - Beauty Laboratories equipment vendor has proposed to the company that they purchase an automatic bottle loading machine that would save them considerable salary costs over the next several years. The new equipment would cost $750,000 and have a useful life of 7 years. The machine would have a $50,000 salvage/residual value at that time. By automating the loading process Beauty Laboratories. Would be able to reduce their labor force by 3 employees. Currently each of these employees earn $50,000 per year. At the beginning of year 4 the company anticipates the minimum wage increasing, thereby, causing the company to give each employee a 10% wage increase. The company uses a 10% discount rate in evaluating these types of proposals.

Required -

1. Should the company purchase the new equipment? Support your decision with facts.

2. Considering the current rise in the inflation rate the company is concerned that the risks associated with this purchase maybe higher than previously thought. Therefore, they are raising the discount rate 13% for evaluating proposals of this type.

a. Should the company purchase the new equipment? Support your decision with facts.

b. If they do decide to go ahead with this project what is the most they can pay for the machinery.

Reference no: EM133163673

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