Present-Worth Comparison (Revenue Projects with Equal Lives): Three Alternatives

Bullard Company (BC) is considering expanding its range of industrial machinery products by manufacturing machine tables, saddles, machine bases, and other similar parts. Several combinations of new equipment and personnel could serve to fulfil this new function:

• Method 1 (M1): new machining center with three operators.

• Method 2 (M2): new machining center with an automatic pallet changer and three operators.

• Method 3 (M3): new machining center with an automatic pallet changer and two task-sharing operators.

Each of these arrangements incurs different costs and revenues. The time taken to load and unload parts is reduced in the pallet-changer cases. Certainly, it costs more to acquire, install, and tool-fit a pallet changer, but because the device is more efficient and versatile, it can generate larger annual revenues. Although saving on labor costs, task sharing operators take longer to train and are more inefficient initially. As the operators become more experienced at their tasks and get used to collaborating with each other, it is expected that the annual benefits will increase by 13% per year over the five-year study period. BC has estimated the investment costs and additional revenues as follows:

Machining Center Methods

M1

M2

M3

Investment:

Machine tool purchase

$121,000

$121,000

$121,000

Automatic pallet changer

$ 66,600

$ 66,600

Installation

$ 30,000

$ 42,000

$ 42,000

Tooling expense

$ 58,000

$ 65,000

$ 65,000

Total investment

$209,000

$294,600

$294,600

Annual benefits: Year 1

Additional revenues

$ 55,000

$ 69,300

$ 36,000

Direct labor savings

$ 17,300

Setup savings

$ 4,700

$ 4,700

Year 1: Net revenues

$ 55,000

$ 74,000

$ 58,000

Years 2–5: Net revenues

constant

constant

g

=

13%/year

Salvage value in year 5

$ 80,000

$120,000

$120,000

All cash flows include all tax effects. “Do nothing” is obviously an option, since BC will not undertake this expansion if none of the proposed methods is economically viable. If a method is chosen, BC expects to operate the machining center over the next five years. On the basis of the use of the PW measure at i = 12%, which option would be selected? 

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Status NEW Posted 29 May 2017 06:05 AM My Price 8.00

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