The management of Better Plastics has recently been looking at a proposal to purchase a new plastic-injection-style molding machine. With the new machine, the company would not have to buy small plastic parts to use in production. The estimated useful life of the machine is 15 years, and the purchase price, including all setup charges is $400,000. The residual value is estimated to be $40,000. The net addition to the company's cash inflow as a result of the savings from making the parts is estimated to be $70,000 a year. Better Plastics' management has decided on a minimum rate of return of 14 percent. Use Tables 1 and 2 in the appendix on present value tables.
You can access tables 1 and 2 on the website below. It will be on page 1134 and 1135.
1. Using the net present value method to evaluate this capital investment, determine whether the company should purchase the machine. Support your answer.
2. If the management of Better Plastics had decided on a minimum rate of return of 16 percent, should the machine be purchased? Show all computations to support your answer.
We will use Net Present Value to make purchasing decisions regarding purchasing a plastic molding machine.