posted by Cheryl on .
The XYZ Corporation is contemplating the introduction of a new machine tool which will be used solely in the manufacture of a rotor shaft. 50,000 units per year are expected to be manufactured, and the time study group anticpates a standard of 2.5 hours per piece. The labor rate for the first year is expected to be 5.60 per hour. The present method takes 3.0 hours at the same rate. The new machine tool will cost $800,000 and will be depreciated on a straight line basis over a period of 10 years with no residual value. $150,000 of special tools will be needed. It is expected that the useful life of the special tools will be 250,000 pieces. The benefit rate is 30 percent.
Basing your judgment solely on the facts listed above, should the tool be purchased?