The engineering team at Manuel’s Manufacturing, Inc., is planning to purchase an

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% per year MARR.

a) What is the annual worth of each investment?

vendor a:

vendor b:

b)What is the decision rule for determining the preferred investment based on annual worth ranking?

c)Which ERP system should Manuel purchase?

Explanation / Answer

1) Vendor A Year Cash Flows Discount @10% Present value of Cash Flows 0 -380000 1 -380000 1 125000 0.909090909 113636.3636 2 125000 0.826446281 103305.7851 3 125000 0.751314801 93914.35011 4 125000 0.683013455 85376.68192 Net Present Value 3.169865446 16233.18079 Annual worth 5121.094592 Vendor B Year Cash Flows Discount @10% Present value of Cash Flows 0 -280000 1 -280000 1 95000 0.909090909 86363.63636 2 95000 0.826446281 78512.39669 3 95000 0.751314801 71374.90609 4 95000 0.683013455 64886.27826 Net Present Value 3.169865446 21137.2174 Annual worth 6668.174962 2) Decision Rule: The highest Annual worth will be selected. The higher the annual worth the higher the benefit. 3) Vendor B should be selected as it has highest Annual worth.

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