The Snethen Corporation has the opportunity to manufacture a new chemical but will have to buy a new machine that costs $350,000 to produce the chemical. The net present value of the new machine is $2,500. However, you have learned that in calculating the net present value, the cost of disposing of a waste product that the EPA has labeled mildly hazardous was excluded. Snethen disputes the EPA’s claim that the waste product is toxic. Therefore, Snethen management decided it could avoid the disposal cost by dumping the waste with other trash.
Should Snethen buy the new machine? Why?
Oaks Company is a small company that employs 15 people in a town with a population of about 9,000. Oaks’s plant manager is considering the acquisition of a new machine that will cost $474,500. The machine will replace five long-time employees and is expected to generate savings of $105,600 in after-tax cash flows for the next 10 years. Oaks’s cost of capital is 18 percent.
Based on the net present value of the machine, should Oaks buy the machine?
Are there qualitative factors that he should consider in his decision? Why?
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