Ramsey's Framing Service makes frames for artwork, photographs, and diplomas brought into the business. Many customers want the work completed while they wait.
Ramsey wants to buy a mat guillotine that will cut by 50% the time it takes to complete a framing job. The machine will cost $1,100 and he has developed the following estimates:
Cost of capital: 10%
Useful life of the machine: 7 years
Salvage value of the machine after 7 years: $120.
Although the guillotine will save time, the only tangible cost savings will be about $180 per year. The analysis shows a negative net present value.
Using a calculator or Excel, calculate the net present value of the guillotine.
Should Ramsey make the purchase, based solely on the numbers?
Ramsey believes the machine will produce the intangible benefit of greater customer satisfaction. How much per year must Ramsey be willing to pay for this benefit?