Should smith purchase the new machines

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Reference no: EM13305874

Smith electronics manufacturing Lilian Perez the Vp odoperations at smith electronics is considering a major capitalinvestments decision. It would cost 2,500,000 to put new highlyautomated machines in the factory. The equipment would last about15 years and would have no slavage value at the end of that peroid.The equipment will replace 10 workers saving smith 300,000 per yearin direct labor. Operating and maintainace costs on the machine areexpected to cost 100,000 per year. The automated equipment isexpected to improve qua;ity. Smith main competitiors are installingsimiliar equipment. If Smith installs the equipment its revenue areexpected to remain steady. If smith chooses not to install theequipment its contributions margin is expected to fall by 200,000per year as a result of lower quality compared to its competitors.Smith discount rate is 10% and its tax rate is 30%.

a. How much is Smith expected to save each year if its installthe equipment including tax effects.
b. How much will Smith lose each year if it does not installthe equipment including tax effects.
c . Explian how much would analyze this problem in order todetermine if Smith should purchase the new machines.
d. Should Smith purchase the new machines.
e. Assume that p[rogramming and maintanance cost turn out tobe much higher that Lillians estimates. How ever despite the factthe automation equipment increased costs, Lillian still wants tocontinue with the project. Explain why Lillian might not want toscrap the equipment.

Reference no: EM13305874

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