Problem:
The following contains cost and benefit information for two different alternatives for a w capital investment in computerized process technologies to control the process at a manufacturing plant (this is a tremendous upgrade from the current process).
ITEM CMM-PLC Option FMS-Integrated Option
Initial Investment $ 15,000,000 $ 18,000,000
Annual O&M Costs
Annual Labor Costs 500,000 520,000
Annual Material Costs 498,000 450,000
Annual Overhead Costs 1,500,000 1,600,000
Annual Tooling Costs 225,000 230,000
Annual Income Taxes 950,000 975,000
Net Annual Benefits $ 6,500,000 $ 7,000,000
(revenue increase & maintenance savings)
Net Salvage Value $ 500,000 $ 750,000
Use internal rate of return (IRR) and the appropriate incremental analysis to determine the best alternative. Use 8% as the minimum attractive rate of return (MARR) and assume an 8 YEAR useful life for both projects.