Acme Corporation is going to buy a manufacturing system to produce its shaft couplings over six years. It is considering two types: the Cellular Manufacturing System (CMS) or the Flexible Manufacturing System (FMS). Acme will only buy one. There is no difference in the quantity or quality of output. With either system, the firm will produce output of 544,000 units per year. The output price today is $25 per unit, but prices are expected to increase 5% per year over the life of the project. Cellular Manufacturing System (CMS) The initial investment cost of CMS is $8,000,000. CMS systems have a life of three years. The price of new CMS systems is expected to increase 5% per year. Today, three-year-old used CMS sell for $1,000,000. The price of three-year-old used CMS systems is expected to increase 5% per year as well. Flexible Manufacturing System (FMS) The initial investment cost of FMS is $5,000,000. FMS systems have a life of six years. Today, a six-year-old used FMS sell for $400,000. The price of six-year-old used FMS systems is expected to increase 5% per year. The annual equivalent operating costs for CMS and FMS are shown in the table below. Acme Corporation has a minimum acceptable rate of return (MARR) of 15%. Using the internal rate of return (IRR) evaluation method, determine which system Acme should purchase. (Report IRR to two decimal places).
Acme Corporation is going to buy a manufacturing system to produce its shaft couplings over six years. It is considering two types: the Cellular Manufacturing System (CMS) or the Flexible Manufacturing System (FMS). Acme will only buy one. There is no difference in the quantity or quality of output. With either system, the firm will produce output of 544,000 units per year. The output price today is $25 per unit, but prices are expected to increase 5% per year over the life of the project. Cellular Manufacturing System (CMS) The initial investment cost of CMS is $8,000,000. CMS systems have a life of three years. The price of new CMS systems is expected to increase 5% per year. Today, three-year-old used CMS sell for $1,000,000. The price of three-year-old used CMS systems is expected to increase 5% per year as well. Flexible Manufacturing System (FMS) The initial investment cost of FMS is $5,000,000. FMS systems have a life of six years. Today, a six-year-old used FMS sell for $400,000. The price of six-year-old used FMS systems is expected to increase 5% per year. The annual equivalent operating costs for CMS and FMS are shown in the table below. Acme Corporation has a minimum acceptable rate of return (MARR) of 15%. Using the internal rate of return (IRR) evaluation method, determine which system Acme should purchase. (Report IRR to two decimal places).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Acme Corporation is going to buy a manufacturing system to produce its shaft couplings over six years. It is considering
two types: the Cellular Manufacturing System (CMS) or the Flexible Manufacturing System (FMS). Acme will only buy one.
There is no difference in the quantity or quality of output. With either system, the firm will produce output of 544,000
units per year. The output price today is $25 per unit, but prices are expected to increase 5% per year over the life of the
project.
Cellular Manufacturing System (CMS) The initial investment cost of CMS is $8,000,000. CMS systems have a life of three
years. The price of new CMS systems is expected to increase 5% per year. Today, three-year-old used CMS sell for
$1,000,000. The price of three-year-old used CMS systems is expected to increase 5% per year as well.
Flexible Manufacturing System (FMS) The initial investment cost of FMS is $5,000,000. FMS systems have a life of six
years. Today, a six-year-old used FMS sell for $400,000. The price of six-year-old used FMS systems is expected to
increase 5% per year.
The annual equivalent operating costs for CMS and FMS are shown in the table below.
Acme Corporation has a minimum acceptable rate of return (MARR) of 15%.
Using the internal rate of return (IRR) evaluation method, determine which system Acme should purchase. (Report IRR to
two decimal places).
Costs
Annual labour costs
Annual material costs
Annual overhead costs
Annual tooling costs
Annual inventory costs
Annual income taxes
c
CMS
$707,200
$598,400
$1,950,000
$300,000
$31,500
$1,650,000
FMS
$1,169,600
$833,320
$3,150,000
$470,000
$141,000
$1,650,000
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