problem: A junior executive is fed up with his boss's operating policies. Before leaving the office of his angered superior, the young man advises that a well trained monkey could handle the trivia assigned to him. Pausing a second to consider the import of this closing statement, the boss is seized by the thought that this must have been in the back of her own mind ever since the hired the junior executive. She decides to consider replacing the executive with a bright young baboon. She figures that she could argue strongly to the board that such "capital deepening" is necessary for the cost conscious firm. After two days, a feasibility study is completed, & the following data are presented to the president:
It would cost dollar 12,000 to buy and train a reasonably alert baboon with a life expectancy of twenty years.
Yearly expenses of feeding and housing the baboon would be $4,000.
The junior executive's annual salary is $7,000 [a potential saving if the baboon is hired].
The baboon will be depreciated on a straight-line basis over 20 years to a zero balance.
The firm's marginal tax rate is 40%.
The firm's current cost of capital is determined to be 11%.
On the basis of the net present value criterion, should the monkey be hired [and the junior executive fired]?