Toronto General Hospital is reviewing ways of cutting the cost of stocking medical supplies. Two new stockless systems are being considered, to lower the hospital's holding and handling costs. The hospital's industrial engineer has compiled the relevant financial data for each system as follows (dollar values are in millions): Current Practice Just-in-Time Stockless Supply System System Start-up cost $0 $2.5 Annual stock $2.5 $1.0 $0.1 holding cost Annual operating $2 $1.5 cost System life 7 years 7 years 7 years The system life of 7 years represents the period that the contract with the medical suppliers is in force. The hospital's MARR is 13%, a) What is the incremental rate of return going from the current practice to the just in time system? IRR for (Just in time - Current practice) = b) What is the incremental rate of return going from the just in time system to the stockless supply system? IRR for (Stockless supply - Just in time) = (keep 2 decimal places in numerical results) c) What is the incremental rate of return going from the current practice to the stockless supply system? IRR for (Stockless supply - Current practice) = d) Based on the above calculated numbers, which option is the best by utilizing the incremental rate of return criterion? Toronto General Hospital is reviewing ways of cutting the cost of stocking medical supplies. Two new stockless systems are being considered, to lower the hospital's holding and handling costs. The hospital's industrial engineer has compiled the relevant financial data for each system as follows (dollar values are in millions): Current Practice Just-in-Time Stockless Supply System System Start-up cost $0 $2.5 Annual stock $2.5 $1.0 $0.1 holding cost Annual operating $2 $1.5 cost System life 7 years 7 years 7 years The system life of 7 years represents the period that the contract with the medical suppliers is in force. The hospital's MARR is 13%, a) What is the incremental rate of return going from the current practice to the just in time system? IRR for (Just in time - Current practice) = b) What is the incremental rate of return going from the just in time system to the stockless supply system? IRR for (Stockless supply - Just in time) = (keep 2 decimal places in numerical results) c) What is the incremental rate of return going from the current practice to the stockless supply system? IRR for (Stockless supply - Current practice) = d) Based on the above calculated numbers, which option is the best by utilizing the incremental rate of return criterion
