A company is investigating the use of an automated machine to inspect the final product quality of their bio-derived plastic window treatments. The machine has a capital cost of $17 million. It is available from the vendor in New Jersey, in a fairly short time frame of about two months. Costs of shipping from the FOB point in New Jersey would be $50,000. Building modifications and the total costs of installation are estimated at $130,000. Assume operating costs of the equipment to be minor. A trip for you and the product manager to New Jersey to pre-inspect the machine will cost $5,000 total, for flights, hotel, and meals.

Currently, the company uses manual labor inspection. These workers cost the company an hourly wage of $35/hour, and can be called on-site at short notice. A well-trained inspector can inspect 7 window treatments per hour, and the product manager estimates that she needs 16 inspectors to inspect the items and complete production on time. They work 8 hours per shift, and 200 shifts per year are required. The company sells about 170,000 treatments a year at a sales price of $75 each to the wholesaler.

There is also a risk of false negatives (15 %) from the manual inspection, so the company actually pays the workers $25/ hour and sets the other $10/hour to cover cost of poor quality. This contingency is considered a regular business expense. The automated machine has an extremely low false negative rate of 2%, so no cash reserve is anticipated to be needed.

1)The company uses a planning horizon of four years and has a corporate MARR of 12%. Make a pre-tax analysis of this situation.

2) Based on the calculations, what do you recommend the company?