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Should Eddie recommend that purchase of the robot?

Should Eddie recommend that purchase of the robot?

Essentials Of Investments
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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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?
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?
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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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