The plant manager of Taiwan Electronics Company is considering the purchase of new automated assembly equipment

The plant manager of Taiwan Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $1,400,000. The manager believes that the new investment will result in direct labor savings of $350,000 per year for 10 years.

a. What is the payback period on this project?

b. What is the net present value, assuming a 10% rate of return? Use the present value of an annuity of $1 table in Exhibit 2.

c. What else should the manager consider in the analysis?


Answer:

a. Payback period: 
$1,400,000 
$350,000 
=  4 years 
b. Net present value: 
Present value factor for an annuity of $1, 10 periods at 10%: 6.145 
Net present value = (6.145 × $350,000) – $1,400,000 = $750,750 
c. Some critical elements that are missing from this analysis are: 
●   The manager is viewing the acquisition of automated assembly equipment as 
a labor-saving device. This is probably a limited way to view the investment. 
Instead, the equipment should allow the company to assemble the product 
with higher quality and higher flexibility. This should translate into greater 
sales volume, better pricing, and lower inventories. All of these could be 
brought into the analysis. 
●   The cost of the automated assembly equipment does not stop with the initial 
purchase price and installation costs. The equipment will require the company 
to hire engineers and support personnel to keep the machines running, to 
program the software, and to debug new programs. The operators will require 
new training. Thus, extensive training costs will likely be incurred. It would not 
be surprising to see a large portion of the direct labor savings lost by hiring 
expensive indirect labor support for the technology. 
●   There will likely be a start-up or learning curve with this new technology that 
will cause the benefits to be delayed. 
●   The analysis fails to account for taxes.