Compensation; Net Present Value Choco-Lots Candy Co. makes chewy chocolate candies at a plant in Winston-Salem, North Carolina. Brian Main, the production manager at this facility, installed a packaging machine last year at a cost of $400,000. This machine is expected to last for 10 more years with no residual value. Operating costs for the projected levels of production are $80,000 annually.
Brian has just learned of a new packaging machine that would work much more efficiently in Choco-Lots’ production line. This machine would cost $420,000 installed, but the annual operating costs would be only $30,000. This machine would be depreciated over 10 years with no residual value. He could sell the current packaging machine this year for $150,000.
Brian has worked for Choco-Lots for seven years. He plans to remain with the firm for about two more years, when he expects to become a vice president of operations at his father-in-law’s company. Choco-Lots pays Brian a fixed salary with an annual bonus of 1 percent of net income for the year.
Assume that Choco-Lots uses straight-line depreciation and has a 10 percent required rate of return. Ignore income tax effects.
Required
1. As the owner of Choco-Lots, would you want Brian to keep the current machine or purchase the new one?
2. Why might Brian not prefer to make the decision that the owner of Choco-Lots desires?
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