Reference no: EM132474095

Point 1: Mr Burns the President of the Springvale Electrical Company is sick and tired of falling cash flows and as a result decreasing NPV. The company itself is responsible for making electrical components, but of late has been suffering from decreasing output as the result of one particularly lazy employee. The financial director, Mr Burns' son, George, has come up with an idea of how to overcome this problem. "It's easy, the guy sits around all day stuffing his face with food and sleeping, it's no wonder output has fallen substantially. All we have to do to get things rolling again is to replace him with a new fully automated machine."

Point 2: This replacement would mean the need for one less employee generating salary and benefit savings. The following day the director carries out a feasibility study and the following data is presented to the President.

1. It would cost $60,000 to purchase the new automated machine and it would be expected to have a life expectancy of 20 years.
2. Annual maintenance would be $8,000.
3. The replaced employee's salary is $25,500.
4. The machine will be depreciated on a straight-line basis over 20 years to a zero salvage value.
5. The firm's marginal tax rate is 30 percent.
6. The firm's current cost of capital is estimated to be 15%.

Question 1: Based on the net present value criterion, should the automated machine be purchased and the lazy operator fired? Confirm that your answer is correct by calculating the Internal Rate of Return. Does your answer make sense? Comment