Jamison Specialties manufactures programmable incremental encoders that resist shock and vibration for use in harsh environments. Five years ago, the company invested $650,000 in an automated quality control system and recorded savings of $105,000 per year for the 5 years. The equipment now has a salvage value of $50,000. (a) What is the rate of return per year on the investment? (b) The owner expected to make at least 15% per year on this quality improvement investment. What annual savings were necessary to meet the 15% goal?
What will be an ideal response?
(a) 0 = -650,000 + 105,000(P/A,i*,5) + 50,000(P/F,i*,5)
Since 5(105,000) + 50,000 = 575,000 < 650,000, i* < 0
Use the RATE spreadsheet function to find i*
= RATE(5,105000,-650000,50000) displays i* = -3.74% per year
(b) Let A = annual savings. Solve by factor or Goal Seek
0 = -650,000 + A(P/A,15%,5) + 50,000(P/F,15%,5)
A = $186,490 (Goal Seek)
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