Question

A mechanical robot is part of a welding operation on an automobile assembly line costs $750,000....

A mechanical robot is part of a welding operation on an automobile assembly line costs $750,000. Its annual O& M cost will be $10,000 and its expected life is only 6 years, while its estimated salvage value when retired is anticipated to be approximately $40,000. The robot will replace welding operation labor cost. If the interest rate is 20% what annual labor savings must be realized over the robot’s life to justify the expenditure?

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Answer #1

Initial Cost = $750,000

Annual O & M cost = $10,000

Life = 6 years

Estimated Salvage Value = $40,000

Interest rate = 20%

What annual labor savings must be realized over the robot’s life to justify the expenditure?

Converting the initial cost into annual cost

A = P (A/P, i, n)

A = $750,000 (A/P, 20%, 6)

A = $750,000 (0.3007) = $225,525

Annual O & M Cost = $10,000

Total Annual Cost = $225,525 + $10,000 = $235,525

Converting Salvage value into annual salvage value (revenue)

A = F (A/F, i, n)

A = $40,000 (A/F, 20%, 6)

A = $40,000 (0.1007) = 4,028

Annual Worth (AEC) = $235,525 – 4,028 = $231,497

Annual labor savings of $231,497 must be realized over the robot’s life to justify the expenditure

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