A toy manufacturer is considering purchase of a new packaging machine for $150,000. Annual labor savings are estimated to be $25,000 the first year and then increase 10% per year (geometric gradient). Routine maintenance will cost $2500 per year. The warranty will cover any major maintenance issues for the first 2 years, but the company will then purchase the major maintenance contract at a cost of $2000 per year, payable at the beginning of the year. The expected life of the equipment is 10 years.
If the company’s MARR is 10%, is the equipment justified? (Use NPV. Ignore depreciation and taxes)