Explain decision making on the basis of the net present

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Reference no: EM1313557

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 young man suggests that a well-trained monkey could handle the trivia assigned to him. Pausing a moment to consider the import of the closing statement, the boss is seized by the thought that this must have been in the back of her own mind ever since she hired the junior executive. She decides to consider replacing the executive with a bright young 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 $12,000 to purchase and train a reasonably alert baboon with a life expectancy of 20 years.

• Annual expenses of feeding and housing the baboon would be $4,000.

• The junior executive's annual salary is $7,000 (a potential savings if the baboon is hired).

• The baboon will be depreciated in a straight-line basis over 20 years to a zero balance.

• The firm's marginal tax rate is 40%

• The firm's current cost of capital is estimated at 11%

One the basis of the net present criterion, should the monkey be hired and the junior executive be fired?

Reference no: EM1313557

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