Internal rate of return - incremental analysis, Managerial Economics

The following contains cost and benefit information for two different alternatives for a w capital investment in computerized process technologies to control the process at a manufacturing plant (this is a tremendous upgrade from the current process).

ITEM

CMM-PLC Option

FMS-Integrated Option

Initial Investment

$ 15,000,000

$ 18,000,000

Annual O&M Costs

 

 

       Annual Labor Costs

500,000

520,000

       Annual Material Costs

498,000

450,000

       Annual Overhead Costs

1,500,000 

1,600,000

       Annual Tooling Costs

225,000

230,000

       Annual Income Taxes

950,000

975,000

Net Annual Benefits (revenue increase & maintenance savings)

$ 6,500,000 

$ 7,000,000

Net Salvage Value

$ 500,000

$ 750,000

 

 

 

Use internal rate of return (IRR) and the appropriate incremental analysis to determine the best alternative.  Use 8% as the minimum attractive rate of return (MARR) and assume an 8 YEAR useful life for both projects.

Posted Date: 2/16/2013 12:32:31 AM | Location : United States







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