You run a small bagel shop and are considering replacing your four employees with automated machines that allow customers to buy their bagels without any human interaction. Of the following,
The most diﬃcult task you face in computing the NPV of this change is the:
A) Estimation of the reduction in wages you will have from the decrease in work force.
B) Estimation of the reduction in taxes you will get from the increase in depreciation.
C) Estimation of the cost of purchasing the new equipment.
D) Estimation of the cost of installing the new equipment.
E) Estimation of the total change in sales that will result from the change.

Question

Quizplus · Accepted Answer

The most difficult task in computing the NPV of replacing employees with automated machines is estimating the total change in sales that will result from the change. This is because it is difficult to predict how customers will react to the change and if sales will increase, decrease, or remain the same. The other tasks - estimating the reduction in wages, reduction in taxes, cost of purchasing the equipment, and cost of installing the equipment - are relatively straightforward and can be more easily estimated.

You Run a Small Bagel Shop and Are Considering Replacing