Reference no: EM13380817

Valley Proteins is evaluating the purchase of a new centrifuge to be used in settling out the fine particles from the liquid feed ingredients produced by the firm. The old centrifuge was purchased from the Bird Machine Company, but must now be replaced due to a new EPA mandate limiting energy consumption for centrifuges. A new energy efficient Bird centrifuge would cost $400,000 and have a useful life of 6 years. However, the firm is also evaluating the purchase of a Harburg-Freudenberger centrifuge, which would cost $575,000 and have a useful life of 8 years. Although the Bird centrifuge is less expensive, the yearly cost of maintenance at the end of each year would be $38,000. The Harburg-Freudenberger centrifuge can be operated for a full two-year period without downtime for maintenance, but requires an extensive overhaul costing $50,000 at the end of each two-year operating cycle. The Internal Revenue Service permits manufacturing equipment used in agricultural production (including centrifuges) to be depreciated to a zero salvage value over a 5-year life. Assuming that Valley Proteins has a tax rate of 30 percent and that their opportunity cost of capital (required return) is 10 percent, determine whether the firm should purchase the centrifuge from Harburg-Freudenberger or the Bird Machine Co. centrifuge.