Falk Corporation is considering two types of manufacturing systems to produce it
ID: 1103426 • Letter: F
Question
Falk Corporation is considering two types of manufacturing systems to produce its shaft couplings over 6 years: (1) A cellular manufacturing system (CMS) and (2) a flexible manufacturing system (FMS). The average number of pieces to be produced on either system would be 544,000 per year. Operating cost, initial investment, and salvage value for each alternative are estimated as follows:
3. (20 points Spreadsheet Incremental rate of return with "Cost only" project alternative): Falk Corporation is considering two types of manufacturing systems to produce its shaft couplings over 6 years: (1) A cellular manufacturing system (CMS) and (2) a flexible manufacturing system (FMS). The average number of pieces to be produced on either system would be 544,000 per year. Operating cost, initial investment, and salvage value for each alternative are estimated as follows: Total annual costs Investment Net salvage value CMS Option FMS Option S5,504,100 $12,500,000 $1,000,000 $7,412,920 $4,500,000 S500,000 MARR is l 5%, which alternative is better based on Incremental rate of return criterion? (partial solution is set up in the spreadsheet given with this problems set.Explanation / Answer
Find the increment over FMS - CMS
Find the IRR so that PW of increment is zero
(-12,500,000 - (-4,500,000)) + (1,000,000 - 500,000)(P/F, i%, 6) - (-5,504,100 + 7,412,920)(P/A, i%, 6) = 0
-8,000,000 + 500,000(P/F, i%, 6) + 1,908,820(P/A, i%, 6) = 0
Trial and error gives an interest rate range of 12% to 13%.
NPV(12%) = 101,252
NPV(13%) = -129237.75
Interpolation gives IRR = R1 + (R2 - R1) x (NPV(12%)/(NPV(12%) + NPV(13%))
= 12% + (13% - 12%)*(101,252/(101,252 +129237.75))
= 12.43%
End of year CMS FMS Increment FMS - CMS 0 -4500000 -12500000 -8000000 1 -7412920 -5504100 1908820 2 -7412920 -5504100 1908820 3 -7412920 -5504100 1908820 4 -7412920 -5504100 1908820 5 -7412920 -5504100 1908820 6 -6912920 -4504100 2408820Related Questions
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