ABC Corporation is going to buy a manufacturing system to produce its shaft couplings over six years. It is considering two types: Type A or Type B. Acme will only buy one. There is no difference in the quantity or quality of output. With either system the firm will produce output of 544,000 units per year. The output price today is $25 per unit, but prices are expected to increase 5% per year over the life of the project.

Type A:

The initial investment cost of type A is $8,000,000. Type A systems have a life of three years. The price of new type A systems is expected to increase 5% per year. Today, three-year-old used type A sell for $1,000,000. The price of a three-year-old used type A system is expected to increase 5% per year as well.

Type B:

The initial investment cost of type B is $5,000,000. FMS systems have a life of six years. Today, a six-year-old used type B sell for $400,000. The price of six-year-old used type B systems is expected to increase 5% per year.

The annual equivalent operating costs for type A and B are shown in the table below.

ABC Corporation has a minimum acceptable rate of return (MARR) of 15%. Use Excel functions.

Using the internal rate of return (IRR) evaluation method, determine which system Acme should purchase. (Report IRR to two decimal places).

A B

Annual labour costs Annual material costs Annual overhead costs Annual tooling costs Annual inventory costs Annual income taxes $707,200 $598,400 $1,950,000 $300,000 $31,500 $1,650,000 $1,169,600 $833,320 $3,150,000 $470,000 $141,000 $1,650,000 Annual labour costs Annual material costs Annual overhead costs Annual tooling costs Annual inventory costs Annual income taxes $707,200 $598,400 $1,950,000 $300,000 $31,500 $1,650,000 $1,169,600 $833,320 $3,150,000 $470,000 $141,000 $1,650,000