Dele has identified $1.5 million as next years capital budget, although transfers between the capital and operating budgets gives some flexibility. He has indicated that the firm is borrowing money with long-term loans at 9%, that last years returns on sales was 6%, and that contribution to profit and overhead is about 65% for most products.

P1: The computer science department has been using computers for analysis of proposed designs for years, but we have not yet attempted to integrate this with the drafting or manufacturing processes. They have suggested that we purchase an integrated system from the ADAM Corp. (Aiding Design And Manufacturing). The proposal can be undertaken immediately, or we can do a part of it now and decide later on the rest. We believe that ADAM will cut the price for each module by 10% for each one we buy at the same time. Thus if we buy option 3 immediately, then the prices for the analytic, the drafting, and the control modules will all be cut by 20% (both hardware and software). If we wait to purchase the more advanced modules, some decline in hardware costs is likely. They charge a 15% annual fee for maintenance and updates.

Option 1: Replace our current computer system with ADAM's analytic module. This would provide the foundation for purchase of other modules later, and it would allow us to better judge ADAM before we commit substantial sums. This provides little in new capabilities, but would require about 6 man-months in training for users (engineers) at $5000 per month including benefits. The cost for hardware is $50,000 with a 10-year physical life, while the software will cost another $50,000.

Option 2: Add the drafting module. This would cost $75,000 for software and $15,000 for hardware (life about 5 years). This would allow us to eliminate two drafting positions, although about 3 man-months of extra time will be required from one of the engineers.

For option 1 and option 2, calculate IRR (Use 15% MARR for calculating IRR) and Payback period for both options. Show all workings!!!