Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Evaluating Options - Your Company is expanding into a new manufacturing area, but there are two possible ways to do this: Option A: Computerized manufacturing
Evaluating Options - Your Company is expanding into a new manufacturing area, but there are two possible ways to do this:
- Option A: Computerized manufacturing equipment requiring an initial outlay of +3 million for equipment with operating costs (excluding materials, which will be the same for either option) of +20,000 per year for general costs and +80,000 per year in wages for equipment operators. Products from a new computerized line are expected to generate revenues of +650,000 per year over the 20-year life expectancy of the equipment.
- Option B: Manual manufacturing equipment requiring an outlay of +94 million for equipment with operating costs (excluding materials) of +70,000 per year of general costs, plus +240,000 per year for wages to the skilled technicians required to run the manually operated equipment. Products from a new manually operated line are expected to generate revenues of +530,000 per year over the 20-year life expectancy of the equipment.
a) Which option provides the higher internal rate of return?
b) If the company uses a rate of 6% (effective annual rate) for comparing investment options, what is the NPV of each option?
c) What nonfinancial factors should be considered in making the decision on which option to implement?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started