Question

Assume that a new piece of equipment could allow 25% of the labor force in Question 1 to be eliminated. Using a 173-hour working month for each employee, a total equipment cost of $60,000 (which has a useful life of 3 years), and ignoring the effect of cash flow and time value of money, would this be a good use of capital?

I am having a hard time understanding how the book came up with these answers. need it worked out so I understand the process

Yes, this would be a good use of capital. The total annual cost would be $20,000 ($60,000 ÷ 3) and total annual savings would be $285,450 ($23,787.50 per month × 12 months). Therefore, the total monthly benefit is $22,120.83.

Answer 1

Yes, this would be a good use of capital. The total annual cost would be $20,000 ($60,000 ÷ 3) and total annual savings would be $285,450 ($23,787.50 per month × 12 months). Therefore, the total monthly benefit is $22,120.83.

The total cost of the equipemnt with a life of 3 years. With straight line depriciation model. We will assume that each year the utilisation is equal hence total cost is $20000 ($60,000 ÷ 3) . Total annual saving is derived from the past problem by reducing 25% from teh actual cost