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.

Question

Can I 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?

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%