Based upon your experience, you need to recommend which egg grading machine shou
ID: 2633608 • Letter: B
Question
Based upon your experience, you need to recommend which egg grading machine should be purchased for the farm coop you recently joined. Everyone in the area that might use the egg grader has submitted their expected yield for the next four years. SuperEgg is the top machine based upon the feelings of most other members but you have noticed that their machines do not historically have any secondary market. Your research shows that the machines wear out and are not economical to repair after four years of use. CorrectEgg is a less popular choice but as part of their green initiative has a buy back program where you can return the machine after four years for 20% of its sales price. Unfortunately, the CorrectEgg machine runs slower which means that the cash flows from savings would be slightly lower. Both machines cost $10,000 and the cost of capital for the Coop is 12%. SuperEgg will save $3,500, $3,600, $3,500 and $3,700. CorrectEgg will save 90% of the SuperEgg model. What is your recommendation; SuperEgg or CorrectEgg, and why?
Explanation / Answer
NPV of SuperEgg = -10,000 + 3,500 / 1.12 + 3,600 / 1.12^2 + 3,500 / 1.12^3 + 3,700 / 1.12^4 = 837.55
NPV of CorrectEgg = -10,000 + 0.9 * 3,500 / 1.12 + 0.9 * 3,600 / 1.12^2 + 0.9 * 3,500 / 1.12^3 + 0.9 * 3,700 / 1.12^4 + 10,000 * 0.2 / 1.12^4 = 1,024.83
As we can see, the NPV of CorrectEgg is higher because we are able to salvage 20% of the initial price of 10,000 at the end of the 4 years. So we should purchase CorrectEgg.
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