A restaurant operator wishes to choose between two alternative roll-in storage units. Machine A will cost $9,000 and have a trade-in value at the end of its five-year life of $1,500. Machine B will cost $8,500 and at the end of its five-year life will have a trade-in value of $700. As- sume straight-line depreciation.
Investment in the machine will mean that a part-time kitchen worker will not be required, and there will be an annual wage saving of $9,600. The following will be the operating costs, excluding depreciation, for each machine, for each of the five years.
Machine A Machine B Year 12345
Alternative 1
Alternative 2
$24,200 19,800 17,200 10,800
$ 8,400 11,600 17,000 23,000 24,000
8,000
The amount of the investment under either alternative will be $70,000.
Training $800
Maintenance 750 $750 $750 $750 $750
Overhaul Supplies Electricity
300 300 100 100
$550
300 300 300 100 100 100
12345
$700
650 $650 $650 $650 $650
400
500 500 500 500 500 100 100 100 100 100
Income tax rate is 30 percent. For each machine, calculate the NPV by using a 12 percent rate. Ignoring any other considerations, which machine would be the preferable investment?