What should rainbow do, The machine costs $35,000 and is

What should rainbow do

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Reference no: EM132067459

Rainbow Products is considering the purchase of a paint-making machine to reduce labor costs. The savings are expected to result in additional cash flows to Rainbow of $5000 per year.

The machine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost of capital for such an investment is 12%.

Instead of the service contract, Rainbow engineers have devised a different option to preserve and actually enhance the capability of the machine over time.

By investing 20% of the annual cost savings back into new machine parts, the engineers can increase the cost savings at a 4% annual rate.

For example, at the end of year one, 20% of the $5,000 cost savings is reinvested in the machine; the net cash flow is thus $4,000. Next year the cash flow from cost savings grows by 4% to $5,200 gross, or $4,160 net of the 20% investment. As long as the 20% reinvestment continues, the cash flows continue to grow at 4% in perpetuity. What should Rainbow do?

What is NPV?

What is IRR?

What is payback?

Reference no: EM132067459

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