A process control manager is considering two robots to improve materials handling capacity in the production of rigid shaft couplings that mate dissimilar drive components. Robot X has a first cost of $84,000, an annual M&O cost of $31,000, a $40,000 salvage value, and will improve revenues by $96,000 per year. Robot Y has a first cost of $146,000, an annual M&O cost of $28,000, a $47,000 salvage value, and will increase revenues by $119,000 per year. The company’s MARR is 15% per year and it uses a 3-year study period for economic evaluations. Which one should the manager select (a) on the basis of ROR values, and (b) on the basis of the incremental ROR value? (c) Which is the correct selection basis? Perform the analysis by hand or spreadsheet, as instructed.

Question

What will be an ideal response?

Answer 1

By hand, in $1000 units
(a) X vs. DN: i* X : 0 = -84 + (96 - 31)(P/A,i* X ,3) + 40(P/F, i* X ,3)
i* X = 67.9%
Y vs DN: i* Y : 0 = -146 + (119 - 28)(P/A,i* Y ,3) + 47(P/F, i* Y ,3)
i* Y = 47.8%
Both X and Y have i* values > MARR = 15%; select robot X
(b) Incremental CF amounts for (Y-X)
Incremental first cost = $-62,000
Incremental M&O = $3000
Incremental revenue = $23,000
Incremental salvage = $7,000
0 = -62,000 + 3000(P/A,?i*,3) + 23,000(P/A ?i*,3) + 7000(P/F,?i*,3)
Solve for ?i* by trial and error
?i* = 16.8% > MARR = 15%
Select robot Y. Different selection than that based on ROR values
(c) Incremental ROR is the correct basis; selecting robot X in part (a) is incorrect
By spreadsheet

(a) Select robot X since i* X is larger and both exceed MARR
(b) Select robot Y since ?i* = 16.83% > MARR = 15%
(c) Incremental ROR is the correct basis; selecting robot X in part (a) is incorrect