Your question is Evaluate a New Equipment Investment. Take a moment with it on the right.
Talk me through your thinking if you like. When you're confident, submit your answer and I'll grade it like a real screen (7/10 or better passes).
You are reviewing a potential equipment purchase for a mid-sized industrial business that wants to expand capacity without adding headcount. Your CFO has asked you to decide whether the project clears the company’s 10% hurdle rate and how quickly the cash outlay is recovered. The investment has a clear upfront cost, measurable operating savings, and a resale value at the end of its useful life, but demand could come in below plan.
| Metric | Value |
|---|---|
| Upfront equipment cost | $1,800,000 |
| Installation cost | $200,000 |
| Annual labor savings | $520,000 |
| Annual maintenance cost | $80,000 |
| Incremental working capital required | $150,000 |
| Useful life | 5 years |
| Terminal salvage value | $250,000 |
| Tax rate | 25% |
| Discount rate | 10% |
| Base-case annual revenue impact | $0 |
How would you analyze this investment opportunity and decide whether it should be approved? Walk through the economics, the payback, and the value creation under a downside case where annual labor savings are 15% lower than expected.