Supposr a firm is considering an investment proposal to automate its production process to save on labor costs. It can invest $2 million now in equipment and thereby save $700,000 per year in pretax labor costs. If the equipment has an expected life of five years and if the firm pays income tax at the rate of 33.3%, is this a worthwhile investment?
1. What are the incremental cash flows due to the investment?
2. What is the NPV of this project?