Question

31. Suppose a company is considering buying a new copier. The new machine is less labor intensive, and would save somewhat on the wage bill. A clerical assistant, working 10 hours a week (for 50 weeks a year), would not be needed any longer. This assistant, including all benefits and other compensation costs, costs $20 an hour.

A. What is the annual wage savings?

B. Suppose that the machine would last for 5 years. It requires a maintenance agreement, which would cost $500 annually. Use a discount rate of 5%. What is the most the company should be willing to pay for it?

Answer 1

A.

Given that,

Number of hours the clerical assistant works in a year = 10 hours/week x 50 weeks/year = 500 hours per year

The wage of the clerical assistant including all benefits and compensation costs = $20 an hour

Therefore, the annual wage savings = Total number of hours worked per year x Wage per hour = 500 hours/year x $20 per hour = $10,000 per year

B. Life of the machine = 5 years

Annual maintenance cost = $500

Annual savings due to the machine = Wage savings calculated in part A = $10,000 per year

Therefore, net annual savings = Annual savings due to machine - Annual maintenance cost = $10,000 - $500 = $9,500

PW of the net annual savings of $9,500 for 5 years at a discount rate of 5% = $9,500 x (P/A, 5%, 5)

From the compound interest table, we get (P/A, 5%, 5) = 4.329

PW of the net annual savings = $9,500 x 4.329 = $41,125.5

Since the present worth of net annual savings due to the machine is $41,125.5, the company should pay a maximum of $41,125.5 for the machine.