Jerry Stans, a young industrial engineer, prepared an economic analysis for some equipment to replace one production worker. The analysis showed that the present worth of benefits (of employing one less production worker) just equaled the present worth of the equipment costs, based on a 10-year useful life for the equipment. It was decided not to purchase the equipment.
A short time later, the production workers won a new 3-year union contract that granted them an immediate 40Ф-per-hour wage increase, plus an additional 25Ф-per-hour wage increase in each of the two subsequent years. Assume that in each and every future year, a 25Ф-per-hour wage increase will be granted.
Jerry Stans has been asked to revise his earlier economic analysis. The present worth of benefits of replacing one production employee will now increase. Assuming an interest rate of 8%, the justifiable cost of the automation equipment (with a 10-year useful life) will increase by how much? Assume the plant operates a single 8-hour shift, 250 days per year.