Hiring physically challenged people to clean bowling shoes will save BowlingBack

Question

Hiring physically challenged people to clean bowling shoes will save BowlingBackOffice, Inc (BBO) $3,000 per year for the next 5 years but will require a $10,000 investment to retrofit the work area and review operating procedures to ensure that the work can be safely performed by the planned employees. However, BBO could buy a “Bowling Shoe Wash†from the WashItUp Corporation. WashItUp’s device is a bulk shoe wash where used and presumed soiled shoes are loaded on a conveyor belt which moves them through a machine coming out clean and sanitized. The total cost of the shoe wash would be $25,000 with net cash savings of $7,400 per year for 5 years at which point the machine would likely be scrap. BBO has a hurdle rate of 12%. What should BBO do from a financial perspective? And why?

Explanation / Answer

Using a financial calculator the net present value of the first option is 814.33 The net present value of the second is 1675.34. Choose the second due to the higher NPV.

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