Saint Andrews Chlp Company is considering the purchase of a Industrial grade bagging machine to reduce labor costs. The savings are expected to result in additional cash flows to Rainbow of $25,000 per year. The machine costs $125,000 and is expected to last for 10 years. Saint Andrews Chips has determined that the cost of capital for such an Investment is 14%. The firm has the option to buy the machine with or without an annual service contract. The service contract would cost $1200 per year (in addition to the original machine costs). The manufacturer promises "Good As New" servicing that essentially keeps the machine in new condition forever. Net of the cost of the service contract, the machine would then produce cash flows of $23,800 per year in perpetuity. Using the NPV method, first determine if Rainbow Products should 1) buy the machine without the service contract; 2) or buy the machine with the service contract, or 3) not buy the machine at all. Choose the best answer from the options provided below:
- Don't buy the bagging machine
- Buy the bagging machine but don't buy the service contact. NPV of this option is $162,857
- Buy the bagging machine with the service contract. NPV of this option is $5,403
- Buy the bagging machine but don't buy the service contract. NPV is this option is $5,202 tason
