Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:1. Eddie is a production engineer for a major supplier of component parts for cars.
He has determined that a robot can be installed on the production line to replace
one employee. The employee earns $20 per hour and benefits worth $8 per hour
for a total annual cost of $58,240 this year. Eddie estimates this cost will increase
6% each year. The robot will cost $16,500 to operate for the first year with costs
increasing by $1500 each year. The firm uses an interest rate of 15% and a 10-
year planning horizon. The robot costs $75,000 installed and will have a salvage
value of $5000 after 10 years.
Should Eddie recommend that purchase of the robot?
Expert Solution
Step 1
Information Provided:
- Employee cost in Year 1 = $58,240
- Annual Increase in employee cost = 6%
- Robot Year 1 operational cost = $16,500
- Annual Increase in robot operational cost = $1500
- Interest rate = 15%
- Robot costs = $75,000
- Salvage value of Robot = $5000
- Time Horizon = 10 years
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