Smith Inc. is considering buying a new automatic spray painter. The new spray will eliminate two workers and save the firm $40,000 a year in wages. In addition it will improve the quality of the paint job and allow Smith to raise prices so as to increase revenue by $5,000 per year. The new sprayer will cost $125,000 and should last 8 years. It is expected to have no salvage value at the end of the eight years.
Smith's old spray equipment can be sold now for $15,000. It was purchased 4 years ago for $30,000 and would last 8 more years and have zero salvage value then. Smith gas a 40% tax rate and uses straight line depreciation. For this type of project it uses a required rate of return of 10%. Should smith buy the new sprayer.