We can assume numbers for the revenue like ($10 per gallons) And time would be f

Question

We can assume numbers for the revenue like ($10 per gallons)

And time would be for 10 years.

Currently, Bryer’ s Ice Cream uses Finamac continuous ice cream machines for their process. However, last week, Emery Thompson, a competitor of Finamac came into the facility to propose a new system that would improve the operation. The Finamac system has the following characteristics: Production Rate on Line: 120 Gallons per minute Production Labor on line 5 people Production Labor rate: $25 per hour, 8 hour/day, 5days aweek for 50 weeks per year Production Losses for Change Over: 400 gallons per change over Production Change overs per year: 100 Changes Cost of 1 Gallon Production Loss: $1.27 With the Emery Thompson system, there are many improvements: Production Rate on Line: 150 Gallons per Minute Production Labor on line: 4 people Production Labor Rate:   $25 per hour, 8 hour/day, 5days aweek for 50 weeks per year Production Losses for Change Over: 100 Gallons Production Change Overs per year 100 Cost of 1 Gallon Production Loss: $1.27 The new Emery Thompson system would cost $12,620,000 up front and would have required maintenance of $1,000,000 per year going up at 6% per year.    Would you recommend this project at the company MARR of 12%? Do you ecommend it?why?

We can assume numbers for the revenue like ($10 per gallons)

And time would be for 10 years.

Explanation / Answer

From the above it is clear that the incremental revenue is more than the incremental cost and hence the proposal can be accepted.

Particulars Scenario-1 Scenario-2 Production rate on line (gallons per minute) 120 150 Production Hrs/day 8 8 No of days/week 5 5 No of weeks/year 50 50 No of minutes per year(60*8hrs*5days*50weeks) 120000 120000 Total Production of gallons 14400000 18000000 Production losses(400*100)&(100*100) 40000 10000 Net Production in Gallons 14360000 17990000 Revenue @$10 per gallon per annum $        143,600,000 $        179,900,000 Less: Cost of production losses per annum $                   50,800 $                   12,700 Net Revenue per annum $        143,549,200 $        179,887,300 Incremental Revenue per annum $          36,338,100 Incremental revenue for 10 years $363,381,000 Incremental Cost Upfront cost $          12,620,000 Annual maintenance cost $             1,000,000 Inflation rate per annum for maintenance cost 6% Rate of Interest per annum 12%

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