One of Suzanne’s project engineers e-mailed her the screen-shot (below) of his spreadsheet analysis of the annual costs and savings for two equivalent systems considered for installation as a major upgrade of the fire and safety systems that reduce the possibility of human injury on the company’s prime assembly line. He included the following statement in the e-mail: “Since the company’s MARR is 20% per year, the extra investment in FirstSafe (FS) is not justified with a breakeven incremental ROR of 16.86%. However, with an exception to reduce the required return to 16%, or slightly above this, for this case only, FirstSafe is economically acceptable over FireWall (FW). Besides, I like the features on FirstSafe much better than those of the other, less expensive FW system. Can I

Question

go ahead and order the FirstSafe system?” From all that you have learned in these last two chapters, would you recommend that Suzanne accept this analysis and respond “Yes” to the request to purchase FirstSafe? If not satisfied, what additional information would you suggest that Suzanne request of her engineer?







What will be an ideal response?

Answer 1

Sample further information items to request before saying ‘yes”:
? What about multiple ?i* values?
? Basis of negative CF in years 5 and 10
? Basis and percentage of increased savings from year 7 forward
? Required extra savings of FS to reach MARR of 20%