Problem: CU Boxes Inc. makes boxes for shoe manufacturers. One of the machines that CU uses may need replacement. The following information is available to you:
Revenues will not change if the machine is replaced.
Both the present machine and the new machine will last 5 years and will have no disposal value in five years.
The new machine will cost $2,000,000. The old machine can be disposed of right now for a disposal value of $60,000.
The new machine will reduce operating costs by $600,000 per year (assume cash flows at the end of the years.)
Assume a required rate of return or discount rate of 9%
Part 1: Determine if the new machine should be purchased. Use NPV, IRR, and Payback in your analysis where appropriate.
Part 2: What method (NPV or others) is the best method to use for capital budgeting purposes? Defend your arguments carefully, and take into account the following among other concerns:
a) Ease of use
b) Quality of information from such method
c) Quantity of information from such method