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Problem - Michelin is considering going "lights out" in the mixing area of the business that operates 24%. Currently, personnel with a loaded cost of $600,000 per year are used to manually weigh real rubber, synthetic rubber, carbon black, oils, and other components prior to manual insertion in a Banbary mixer that provides a homogeneous blend of rubber for making tires (rubber products). New technology is available that has the reliability and consistency desired to equal or exceed the quality of blend now achieved manually. It requires an investment of $2.5 million, with $110,000 per year operational costs and will replace all of the manual effort described above. The planning horizon is 3 years and there will be a $300,000 salvage value at that time for the new technology. The income-tax rate is 25% and the after-tax MARE is 10%.
Required -
a. Determine the annual cost of purchasing the new technology.
b. Determine the annual cost of continuing with the manual mixing.
c. Determine the amount of the investment in new technology that would make the two alternatives equivalent.
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