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Suppose we are considering automating some part of an existing production process. The necessary equipment costs $80,000 to buy and install. The automation would have
Suppose we are considering automating some part of an existing production process. The necessary equipment costs $80,000 to buy and install. The automation would have no effect on revenues, but it is expected to save the firm $22,000 per year in before-tax operating costs, mainly labor. It also has no effect on net working capital. Assume the equipment has a five year life and is depreciated to zero on a straight line basis. It will actually be worth $20,000 in five years. The tax rate is 34%, and the discount rate is 10%. Should we automate?
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