Question

You are considering buying a piece of industrial equipment to automate a part of your production process. This automation will save labor costs by as much as $35,000 per year over 10 years. The equipment costs $200,000. Should you purchase the equipment if your interest rate is 12

Answer 1

Answer:

No.

Step-by-step explanation:

The equipment wll save $35,000 per over for 10 years, which totals to $350,000.

If the equipment is bought on a simple interest rate of 12% annually for ten years, it will cost:

$A = P (1 + rt),\\where\ A =\ Final\ amount,\ r=rate\of\interest\annually,\ t=time,\ P= Principal\ value\\\\P = 200,000r = 0.12t = 10 \\\\A = 200,000 ( 1 + 0.12\times 10)\\A = 200,000 (1 + 1.2)\\A = 200,000 (2.2)\\A = 440,000$

We will need to pay $440,000 in total for the machine in over ten years.

If we compare both values, it can be deduced that industrial equipment is more expensive than labor cost.