A company wants to buy a labor-saving piece of equipment. Using the NPV method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:

• Labor content is 12% of sales, which are annually $10 million.
• The new equipment will save 20% of labor annually.
• The new equipment will last 5 years.
• The new equipment will cost $200,000

To determine the appropriateness and economic viability of the proposal using the NPV method, we need to calculate the Net Present Value (NPV) of the investment.

1. Calculate the annual labor cost savings:
Labor cost = Sales * Labor content = $10,000,000 * 12% = $1,200,000
Labor cost savings per year = Labor cost * Labor savings = $1,200,000 * 20% = $240,000

2. Determine the cash flows for each year:
Year 0: Initial investment = -$200,000
Year 1 to Year 5: Annual labor cost savings = $240,000

3. Choose a discount rate. The discount rate reflects the time value of money and the risk associated with the investment. Let's assume a discount rate of 8%.

4. Calculate the NPV using the formula:
NPV = (Year 1 Cash Flow / (1 + Discount Rate)^1) + (Year 2 Cash Flow / (1 + Discount Rate)^2) + ... + (Year n Cash Flow / (1 + Discount Rate)^n) - Initial Investment

Applying the formula, we get:
NPV = ($240,000 / (1 + 0.08)^1) + ($240,000 / (1 + 0.08)^2) + ($240,000 / (1 + 0.08)^3) + ($240,000 / (1 + 0.08)^4) + ($240,000 / (1 + 0.08)^5) - $200,000

5. Calculate the NPV:
NPV = $222,222 + $205,761 + $190,701 + $176,966 + $164,499 - $200,000
NPV = $1,159,149

Now, let's assess the proposal's appropriateness and economic viability:

- The NPV of $1,159,149 indicates that the project is economically viable. A positive NPV suggests that the project is expected to generate more cash flows than the initial investment over its 5-year lifespan. This means the investment is likely to be profitable.

- The appropriateness of the proposal can be determined by comparing the NPV to a certain threshold value. If the company has set a minimum acceptable level of NPV (e.g., $500,000), and the calculated NPV is higher than that threshold, then the proposal is considered appropriate. Otherwise, it may be deemed inappropriate.

It's important to note that the appropriateness threshold can vary depending on the company's risk tolerance, desired return on investment, and other factors.