Granny’s Butter and Egg business is considering the purchase of a new Turbo Churn for $25,000. This churn is a special handling device for food and beverage manufacture. It has an estimated life of four years and a salvage value of $5,000. The new churn is expected to increase net income by $8,000 per year for each of the four years of use, before taxes. Granny works with an MARR of 10% and uses MACRS depreciation. Her income tax rate is 40%.
Suppose Granny purchased the churn, but then one year after doing that, the manufacturer announces a new Supercharged Churn. The manufacturer offers all its customers the option of exchanging their old Turbo Churns for a Supercharged Churn for an additional $12,000. The new Supercharged Churn is expected to last for three years, and have a salvage value of $8,000. It will increase net income by $4000 per year MORE than the Turbo Churn, i.e., $12,000 per year versus $8,000 per year Even though Granny still has three years worth of life left on her Turbo Churn, should she pay the extra $12,000 for a Supercharged Churn? Use the same MARR of 10%.