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Question - Rho Ltd. is considering replacing its current manufacturing equipment with the latest equipment available for its industry. If the new equipment is purchased, management expects a number of cost savings. First, the new equipment will require just one operator earning $60,000 per year, whereas the old equipment requires four operators each earning $40,000 per year. Second, because of efficiency improvements, production costs will be reduced by $50,000 per year and maintenance costs for the equipment will be reduced from $75,000 to $50,000 per year. However, depreciation costs on the equipment will increase by $62,500 per year. Rho's tax rate is 35%.
What are the total annual cost savings that should be included in a capital-budgeting analysis using the NPV method? Please show step by step calculations.
a) $51,250
b) $113,750
c) $130,000
d) $175,000
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