Reference no: EM13994800

Permian Basin Proteins is evaluating the purchase of a new centrifuge to be used in settling out the fine particles from the liquid feed ingredients produced by the firm. The old centrifuge purchased from Byrd Manufacturing must be replaced immediately due to a new EPA mandate limiting centrifugal energy consumption. A new energy efficient Byrd centrifuge would cost $400,000 and have a useful life of 6 years. The firm is also evaluating the purchase of a Harburg-Freudenberger centrifuge, which would cost $575,000 and have a useful life of 8 years. Although the Byrd centrifuge is less expensive, the yearly cost of maintenance at the end of each year would be $38,000. The Harburg-Freudenberger centrifuge can be operated for a full two-year period without downtime for maintenance, but requires an extensive overhaul costing $50,000 at the end of each two-year operating cycle. The Internal Revenue Service permits manufacturing equipment used in agricultural production (including centrifuges) to be depreciated to a zero salvage value over a 5-year life. Assuming that Permian Basin Proteins has a tax rate of 30 percent and a required return of 10 percent, determine whether the firm should purchase the Harburg-Freudenberger centrifuge or the Byrd Manufacturing centrifuge.