Carla's Citrus packs and ships high-quality oranges, grapefruit, and other fruit to retailers in the U.S. Carla has been experiencing an increase in demand for its products and is considering the purchase of a new packaging machine to replace the machine currently in use. The new machine will cost $202,500, and installation will require an additional $4,050. The machine has a useful life of 10 years and is expected to have a salvage value of $5,400 at the end of its useful life. The variable cost to operate the new machine is $13.50 per carton compared to the current machine's variable cost of $13.65 per carton. Carla expects to pack 250,000 cartons each year. If the new machine is purchased, Carla will avoid a required $13,500 overhaul of the current machine in three years. The current machine has a market value of $16,200 and will be disposed of.
Required
| a. | Calculate the net present value of the new packaging machine. Assume that Carla |
uses
a 10% discount rate.
| b. | Do you recommend that Carla purchase the new machine? Why or why not? |
| c. | Assume that Carla has adopted a new 15% discount rate. Do you recommend that |
Carla purchase the new machine? Why or why not?
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