A group of Mr. Lugwrench engineers spent 4 years and $50,000 to develop a new pressure test system for coolant hoses with the Old Faceful Corporation. Purchasing quoted the system out, and two systems are being considered - Old Faceful and Blowitoff.
Estimated costs and benefits are:
Old Faceful Blowitoff
Initial Cost $30,000 $ 70,000
Salvage Value 10% of init cost $ 0
Useful Life 3 Years 7 Years
Net Savings per Year $15,000 $20,000
A. Using either an annual cash flow analysis or present worth analysis, if i = 4% and the need is projected to be ongoing, recommend which alternative, if any should be chosen. Show your calculations and list your assumptions and selection criterion.
B. Should the $50,000 development cost be considered in the decision? Explain.