Background

Make-to-Specs is a software system under development by

ABC Corporation. It will be able to translate digital versions of

three-dimensional computer models, containing a wide variety

of part shapes with machined and highly fi nished (ultrasmooth)

surfaces. The product of the system is the numerically

controlled (NC) machine code for the part's manufacturing.

Additionally, Make-to-Specs will build the code for superfi ne

fi nishing of surfaces with continuous control of the fi nishing

machines.

Information

There are two alternative computers that can provide the

server function for the software interfaces and shared database

updates on the manufacturing fl oor while Make-to-

Specs is operating in parallel mode. The server fi rst cost

and estimated contribution to annual net cash fl ow are

summarized below.

Server 1 Server 2

First cost, $ 100,000 200,000

Net cash fl ow, $/year 35,000 50,000 year 1, plus 5000 per

year for years 2, 3, and 4

(gradient)

70,000 maximum for years

5 on, even if the server is

replaced

Life, years 3 or 4 5 or 8

The life estimates were developed by two different individuals:

a design engineer and a manufacturing manager. They have

asked that, at this stage of the project, all analyses be performed

using both life estimates for each system.

Case Study Exercises

Use spreadsheet analysis to determine the following:

1. If the MARR 12%, which server should be selected?

Use the PW or AW method to make the selection.

2. Use incremental ROR analysis to decide between the

servers at MARR 12%.

3. Use any method of economic analysis to display on the

spreadsheet the value of the incremental ROR between

server 2 with