Your company has two alternatives to consider for upgrading an existing production line. Details of each alternative are given below:

Alternative A: ProTech Process Instrumentation Company (a vendor) will revamp all of the industrial process controls on the production line, provide free maintenance for the first year, and train all operators and supervisors for an initial contract price of $220,000. For each year of maintenance after year 1 ProTech will charge $14,500 with a projected increase every year of $1,000. This equipment upgrade only has a 6 year life due to the continual advancement of technology. At the end of those 6 years the equipment will have an estimated salvage value of $25,000 which ProTech agrees to pay and buy the equipment back. This upgrade will allow your company to increase production resulting in additional profits of $53,000 in year 1, then $85,000 in years 2 through 6. There is a tech upgrade required in year 3 that will cost $30,000.

Alternative B: Flawless Controls Inc. is another vendor who has offered a process control upgrade deal. In this alternative Flawless Controls will provide the upgrade equipment at a contract price of $117,500 but your companies maintenance employees will need to install and maintain the equipment. The estimate for in-house installation is $43,700 upfront with a reoccurring cost of $12,700 for maintenance in year 1, increasing by 7% per year for the life of the equipment which is estimated to be 12 years. Tech upgrades will need to occur in years 4 and 8 at an estimated cost of $18,500 in year 4 and $21,000 in year 8. The equipment will have an estimated salvage value of $11,000 in year 12. Additionally there will be upfront training costs in year 1 of $37,500. This upgrade will allow your company to increase production resulting in additional profits of $35,000 in year 1, then $55,000 in year 2, $65,000 in year 3 and then increasing every year thereafter by $8,700.

• Using a present value comparison with least common multiple of lives (LCM approach), which alternative do you recommend?
• Using a planning horizon approach of 9 years, which alternative do you recommend?
• Using an annual value comparison, which alternative do you recommend?

Draw the cash flow diagrams for each of the approaches above and assume your companys MARR is 8%.