After 2 full days of researching different alternatives for sorting operations,
ID: 2612297 • Letter: A
Question
After 2 full days of researching different alternatives for sorting operations, the IE intern decided on the sorting machine with the initial cost of $180,000 and life of 3years. He estimates that the installation cost will be approximately $5,000 and fixture cost of $4,000. The IE internn is being paid $25/hour including benefits. It will take the intern 4 hours to retrain the operator, who is making $15/hour including benefits. The IE intern estimates that the sorting machine will replace 2 full time operators and reduce the direct and indirect material cost by $8,000 per year.
Is this a good investment for this company? Calculate ROI and state your conclusion.
Explanation / Answer
1)
Analysing the investment is as follows:
Particulars
Amount
Machine cost
-189000
Savings in cost for 3 years
296160
Net savings
107160
Working on savings:
Particulars
Amount
Savings in indirect cost
8000
Add:
Savings on IE intern@10/- per hour
90720
98720
Note: The savings on IE intern is 2*54*7*8
=6,048 hours
Thus, it is favourable to make investment.
2)
Return on investment=98,720/189000*100
=52%
Particulars
Amount
Machine cost
-189000
Savings in cost for 3 years
296160
Net savings
107160
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