Question
Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is
Assume that United Technologies is evaluating a proposal to change the company's manual design system to a computer-aided design (CAD) system. The proposed system is expected to save 9,000 design hours per year; an operating cost savings of $45 per hour. The annual cash expenditures of operating the CAD system are estimated to be $200,000. The CAD system requires an initial investment of $550,000. The estimated life of this system is five years with no salvage value. The tax rate is 35 percent. United Technologies has a cost of capital of 14 percent.
Assume that management intends to use double-declining balance depreciation with a switch to straight-line depreciation (applied to any under depreciated balance) starting in Year 4.
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