Eddie is a production engineer for a major supplier of component parts for cars. He has determined that a robot can be installed on the production line to replace one employee. The employee earns $20 per hour and benefits worth $8 per hour for a total annual cost of $58,240 this year. Eddie estimates this cost will increase 6% each year. The robot will cost $16,500 to operate for the first year with costs increasing by $1500 each year. The firm uses an interest rate of 15% and a 10-year planning horizon. The robot costs $75,000 installed and will have a salvage value of $5000 after 10 years. Should Eddie recommend that purchase of the robot

Eddie should recommend the purchase of the robot.

Explanation:

This can be determined using the following 3 steps:

Step 1: Calculation of the present worth (PW) of the cost of one employee

This can be calculated using the formula for calculating the the present value (PV) of a growing annuity as follows:

PWE = (P / (r - g)) * (1 - ((1 + g) / (1 + r))^n) (1)

Where;

PWE = Present worth of the cost of one employee = ?

P = first or this year annual cost = $58,240

r = interest rate = 15%, or 0.15

g = annual growth rate of cost of the one employee = 6%, or 0.06

n = number of years = 10

Substituting the values into equation (1), we have:

PWE = ($58,240 / (0.15 - 0.06)) * (1 - ((1 + 0.06) / (1 + 0.15))^10) = $360,654.33

Step 2: Calculation of the present worth (PW) of the cost of the robot

This can be calculated using the following formula:

PWR = C + ((P / (r - g)) * (1 - ((1 + g) / (1 + r))^n)) - (SV / (1 + r)^n) (2)

Where;

PWR = Present worth of the cost of the robot = ?

C = cost of installing the robot = $75,000

P = first year cost of operating the robot = $16,500

r = interest rate = 15%, or 0.15

g = annual growth rate of cost of operating the robot = Annual increase in cost / P =  $1500 / $16,500 = 0.0909090909090909

n = number of years = 10

SV = Salvage value = $5,000

Substituting the values into equation (2), we have:

PWR = $75,000 + (($16,500 / (0.15 - 0.0909090909090909)) * (1 - ((1 + 0.0909090909090909) / (1 + 0.15))^10)) - (SV / (1 + 0.15)^10) = $188,227.75

Step 3: Recommendation

PWE = Present worth of the cost of one employee = $360,654.33

PWR = Present worth of the cost of the robot = $188,227.75

Since present worth of the cost of the robot of $188,227.75 is lower than the present worth of the cost of one employee of $360,654.33, Eddie should recommend the purchase of the robot.

whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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