Question
A farmer is considering replacing a labor-intensive machine system with a more capital-intensive one. Adopting the new system is estimated to increase machinery operating expenses
A farmer is considering replacing a labor-intensive machine system with a more capital-intensive one. Adopting the new system is estimated to increase machinery operating expenses by about $21000 per year and to replace one hired laborer, whose annual salary is $26,000. The new machiner costs $30,000; however, the trade-in value of the old system is $10,000. Adopting the new machinery will increase annual depreciation by $4000.
Further data indicate an 8-year planning horizon, zero salvage vlaue, a 20% tax rate and a 10% after-tax cost of equity capital. Use the NPV method to evaluate the new machinery system's profitability.
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