You are considering buying a piece of industrial equipment to automate a part of your production process. This automation will save labor costs by $35,000 per year over 8 years. The equipment costs $200,000. Should you purchase the equipment if your interest rate is 10%?

No, you should not purchase the equipment if your interest rate is 10% because you would spent more money on the equipment than what you would save in labor costs.

Explanation:

First, you have to calculate the total amount that you would save in 8 years which is the result of multiplying the amount you save per year for the number of years:

$35,000*8=$280,000

Second, you have to calculate the total amount you would have to pay to purchase the equipment if your interest rate is 10% using the following formula:

A = P (1+rt)

A = accrued amount

P = principal amount: $200,000

r = rate: 0.1

t = time period: 8

A = 200,000 * (1 + (0.1*8))

A = 200,000*1.8

A = 360.000

According to this, in 8 years you would save $280,000 in labor costs but you would have to pay $360,000 for the equipment which means that you will pay more for the machine than what you would save in costs. Because of this, you should not purchase the equipment if your interest rate is 10%.