Background

CLO$4$ Mamufacturing, a conpany specializing in the production of automotive parts, is considering

replacing an aging piece of production equipment. The current equipment has been in use for several

years and requires frequent maintenance, leading to production downtime. The conmany has received

proposals from two suppliers for new equipment.

Supplier A$,$ a new vendor, offers the equipment with untested after$-5$ales service. Supplier B$,$

the conpany's regular vendor, has a proven track record of excellent after$-$sales service.

The company expects the new equipment to increase production capacity by $20\%.$ However,

there is a chance that the new equipment may require additional maintenance.

The company is also considering overhauling the current equipment, which would extend its

life and reduce the ammual operating cost. Furthemore, the company has additional considerations,

such as the potential inpact of new technology, enviroumental regulations, production downtime

during installation, and employee training costs. The company's Mimimum Attractive Rate of Retum

$($MARR$)$ is $12\%.$

Information

The current equipment has a remaining useful life of $5$ years, an annual operating cost of RM$150,000,$

and a salvage value of $RM50,000$ at the end of its useful life. Supplier A offers the equipment at a price

of RM$750,000,$ with an expected useful life of $8$ years, an aumual operating cost of RM$80,000,$ and a

salvage value of RM$100,000.$ Supplier B offers the equipment at a price of RM $800,000,$ with the same

expected useful life of $8$ years, annual operating cost of RM$80,000,$ and salvage value of RM$100,000$

as Supplier A$.$ The new equipment has the potential to generate additional reverue of $RM200,000$ per

year, but there is a $30\%$ chance that it may require additional maintenance, resulting in an extra

RM$20,000$ in ammual costs. The overhaul altermative would cost RM$300,000,$ extend the current

equipment's life by $3$ years, and reduce the anvual operating cost to $RM120,000.$

Case Study Tasks

To help with the analysis, determine the following:

Calculate the Rate of Retumn $($ROR$)$ for the replacement decision using the Present Worth $($PW$)$

method for both suppliers, considering the salvage values, additional revemue, and potential

maintenance costs.

Determine if the replacement is justified for each supplier.

Verify the results by calculating the ROR using the Amoual Worth $($AW$)$ method for both suppliers.

Determine the Incremental Rate of Return $($IROR$)$ for the replacement decision for both stypliers,

considering the potential additional maintenance costs.

Perform a breakeven analysis to find the interest rate at which the company would be incifferent

between keeping the current equipment or replacing it with the equipment from each supplier.

Evaluate the alternative of overhauling the current equipment using the PW and AW methods and

compare it with the replacement options from both suppliers.

Analyse the impact of financing options $($purchase vs$.$ lease$)$ on the replacement decision for each

supplier.

Consider the potential impact of new technology, enviroumental regulations, production downtime,

and training costs on the long$-$term viability of the replacement decision.

Provide a recommendation on whether the company should replace the equipment with Supplier

A$,$ replace the equipment with Supplier B$,$ overhaul the current equipment, or keep the current

equipment as is$.$

Consider the quantitative results, risk factors, the importance of after$-$sales service, financing

options, future technological advancements, euviroumental regulations, production disruptions,

and market demand uncertainty in your recommendation.help