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Q. No. 8: Azba corporation is considering automating its pen factory with the purchase of...

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Q. No. 8: Azba corporation is considering automating its pen factory with the purchase of a $575,000 new machine. Shipping and installation would cost $15,000. Smith has calculated that automation would result in before-tax savings of $65,000 a year due to reduced material costs and $65,000 a year due to reduced labor costs. The machine has a useful life of 5 years and the estimated salvage value of the machine at the end of five years is $100,000. The old machine is fully depreciated but has a salvage value today of $80,000 which can be sold at this value. The firm's marginal tax rate is 40 percent and the firm uses the straight-line depreciation method. Should Azba automate or not based on your calculations using the Profitability Index?

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