The engineering team at Manuel\'s manufacturing, Inc., is planning to purchase a
ID: 1096730 • Letter: T
Question
The engineering team at Manuel's manufacturing, Inc., is planning to purchase an enterprise resource planning (ERP) system. The software and installation from vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel's uses a 4-year planning horizon and a 10 percent per year MARR. a. What is the present worth of each investment? b. What is the decision rule for determining the preferred investment based on present worth ranking? c. Which ERP system should Manuel purchase?Explanation / Answer
case1:intial cost(P)=380000
increase in revenues=125000
Total value of revenues after 4 years=125000*(1+r)^3+125000*(1+r)^2+125000*(1+r)+125000
(considering revenues are generated at end of year.and r in min rate of return)
= 125000((1+r)^4-1)/r
=125000*(1.1^4-1)/0.1
=125000*4.641
= 580,125
Total value of investment after 4 years
=P*(1+r)^4
=380000*1.4641
= 556,358
Profit= 580125 - 556358 = 23767
case2:intial cost(P)=280000
increase in revenues=95000
Total value of revenues after 4 years=95000*(1+r)^3+95000*(1+r)^2+95000*(1+r)+95000
(considering revenues are generated at end of year.and r in min rate of return)
=95000((1+r)^4-1)/r
=95000*(1.1^4-1)/0.1
=95000*4.641
=440,895
Total value of investment after 4 years
=P*(1+r)^4
=280000*1.4641
=409,948
Profit = 440895 - 409948= 30,947
case 2 with vendor B is more profitable.they should go for B
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