Valles Global Industries is considering investing in a new chile trash project in Durango, MX. Specifically, they have three options: two they can buy and one is a subcontract. Unfortunately, they have recently learned that of the two sources for processes they can buy… both are getting out of the business and only one machine of each is available. Their chile trash project will last five years and they will sell the machines after five years but have no estimate of salvage.
Brutus Trash: This machine costs $1,280,000, has annual operating costs of $85,000 and a service life of five years. Estimated site remediation is $-130,000 (yes, negative).
Sparty AgBusiness: This machine costs $1,350,000, has annual operating costs of $100,000 and a service life of five years with an estimated site remediation of $-150,000.
Subcontract to SohnCo Green Systems at an annual cost of $500,000, guaranteed for four years and requiring a four-year commitment. This option is renewable for another four years at an increase for a maximum of $520,000 per year if needed because of market conditions. (That’s up another $20,000 per year).
Use a MARR of 15% and assess options using present worth. Under what conditions might SohnCo be a better option? Taxes and depreciation can be ignored. Discuss, in depth, your conclusions. What happens if the project gets cancelled after two years, i.e., lifecycle ends early. Show your calculations.