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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?

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