Question

Company z is considering purchasing a robotic welding machine which is estimated to reduce expenses by 54,000 per year. The machine will have no effect on revenues but is expected to pay for itself from the cost savings. The welding machine costs 126,000 and will be depreciated on a straight-line basis for 3 years (42,000 per year at t=1, t=2, and t=3). The machine is expected to be sold after 3 years for 30,000. The purchase of the machine would require an increase in inventory of 6,000 and an increase in accounts payable of 1,000 at t=0, and the net operating working capital is expected to be recovered at t=3. Company z's marginal tax rate is 40

Answer 1

Company Z is considering the purchase of a robotic welding machine to reduce expenses, an economic decision influenced by the balance of labor costs and machine costs. The answer explains how changes in wages may lead firms to adopt technologies that use less labor, affecting labor productivity and employment levels.

Step-by-step explanation:

The question posed relates to the economic decision-making process of Company Z considering the acquisition of a robotic welding machine to enhance productivity and reduce expenses. The company is analyzing the financial impact of purchasing the machine, including cost savings, depreciation, changes in operating working capital, and eventual sale of the equipment. The scenario involves evaluating whether the investment will pay for itself from the cost savings it generates, taking into account the various expenses and revenue impacts over a specific time horizon.

In a context where wages are subject to change due to union activity or other factors, firms may adjust their production methods. Higher wages may incentivize firms to employ more machines in place of labor, thus increasing labor productivity and reducing the total number of workers needed.

As wages increase, firms often shift towards technology and production methods that require less labor, illustrated in the examples where different technologies become more cost-effective as wage rates change.