In: Finance
Following the passage of the Tax Cut and Jobs Act, Surfboard, Inc., a small appliance manufacturing firm, is considering adding robotics into its assembly process. With the new tax law, companies can deduct 100 percent of qualified equipment for tax purposes, while depreciating on a straight-line basis on its financial statements.
Currently Surfboard has $250.0 million in annual sales generating a profit margin of 4.5 percent on sales and an asset turnover of 2.5. Surf Board’s engineering group believes the robotics can be installed and operational within the first few months of the year. Surf Boards CFO believes the robotics will reduce operating costs that would pass on to lower sale prices yielding increases annual sales. The CFO estimates that investing $30 million in the robotics would increase sales by $16.5 million as well as increase the profit margin to 6.0 percent, as fewer workers will be needed.
Based solely on the above financial consideration, explain whether you would recommend management consider upgrading automating its assembly process. [Hint: RNOA Analysis]