Question: An assembly operation at a software company currently requires $100,000 per year in labor costs. A robot can be purchased and installed to automate this operation, and the robot will cost $200,000 with no MV at the end of its 10-year life. The robot, if acquired, will be depreciated using SL depreciation to a terminal BV of zero after 10 years. Maintenance and operation expenses of the robot are estimated to be $64,000 per year. The company has an effective income tax rate of 40%. Invested capital must earn at least 8% after income taxes are taken into account.
a. Use the IRR method to determine if the robot is a justifiable investment.
b. If MACRS (seven-year recovery period) had been used in Part (a), would the after-tax IRR be lower or higher than your answer to Part (a)?