Explain decision making on the basis of the net present

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Reference no: EM1313522

Explain decision making On the basis of the net present value criterion

A junior executive is fed up with his boss's operating policies. Before leaving the office of his angered superior, the man suggests that a well-trained monkey could handle the trivia assigned to him. Pausing to consider the import of this closing statement, the boss is seized by the thought that this had been in her mind since she hired him. She decides to replace him with a baboon. She figures that she could argue strongly to the board that such "capital deepening" is necessary for the cost conscious firm. Two days later, a feasibility study is completed and the following data are presented to the president:

*It would cost $12,00 to purchase and train a baboon with a life expectancy of 20 years

*annual expenses of feeding and housing the baboon would be $4,000

*the junior ex. annual salary is $7,000 (a potential saving if the baboon is hired)

*the baboon will be depreciated on a straight line basis over 20 years to a zero balance

*the firms marginal tax rate is 40%

*the firms current cost of capital is estimated to be 11%

On the basis of the net present value criterion, should the monkey be hired and the junior exec. Fired?

Reference no: EM1313522

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