Acme Corporation is going to buy a manufacturing system to produce its shaft couplings over six years. It is considering two types: the Cellular Manufacturing System (CMS) and the Flexible Manufacturing System (FMS). Acme will only buy one.

There is no difference in the quantity or quality of output. With either system, the firm will produce an 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.

Cellular Manufacturing System (CMS) The initial investment cost of CMS is $8,000,000. CMS systems have a life of three years. The price of new CMS systems is expected to increase 5% per year. Today, three-year-old used CMS sell for $1,000,000. The price of three-year-old used CMS systems is expected to increase 5% per year as well.

Flexible Manufacturing System (FMS) The initial investment cost of FMS is $5,000,000. FMS systems have a life of six years. Today, a six-year-old used FMS sells for $400,000. The price of six-year-old used FMS systems is expected to increase 5% per year.

The annual equivalent operating costs for CMS and FMS are shown in the table below.

Acme Corporation has a minimum acceptable rate of return (MARR) of 15%.

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

 

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