Merco, Inc .. a machinery builder in Louisville. Kentucky. is considering making an investment of $ 1.250,000 in a complete structural-bcam-lubrication system.The increased productivity resulting from the installation of the drilling systemis central to the project's justification. Merco estimates the following figures as a basis for calculating productivity:• Increased fabricated-s teel production: 2,000 LOns/year• Average sales price per ton of fabricated steel: $2,566.50• Labor rate:$ I 0.50/hour• Tons of steel produced in a year: LS.000• Cost of steel per ton (2 .205 lb):$ 1.950• Number of workers on the layout. hole making. sawing, and material handling: 17• Additional maintenance cost: $128.500/yearWith the cost of steel at S 1.950 per ton and the direct-labor cost of fabricating l lb at 10 cents. the cost of producing a ton of fabricated steel is about $2. 170.50. With a selling price of $2.566.50 per ton. the resulting contribution to overhead and profit becomes $396 per ton. Assuming that Merco will be able to sustain an increased production of 2.000 tons per year by purchasing the system. the projected additional contribution has been estimated to be 2.000 tons X $396 = $792.000.Since the drilling system has the capacity to fabricate the full range of structural steel. two workers can run the system. one operating the saw and the other operating the drill. A third worker is required to operate a crane for loading and unloading materials. Merco estimates that to perform equivalent work with a conventional manufacturing system would require, on average, an additional 14 people for center punching, hole making with a radial or magnetic drill. and materi al handling. ~n1i s factor translates into labor savings in the amount of $294.000 per year ( 14 x $10.50 x 40hours/week x 50wceks/ycar). The system can last for 15 years with an estimated after-tax salvage value of $80.000. However. after nn annual deduction of $226.000 in corporate incom<.: taxes. the net investment costs. as well as savings, are as follows:• Project investment cost:$ L.250.000• Projected annual net savings:( $792.000 + $29-t.000) - $128.500 - $226.000 = $73 1.500• Projected after-tax salvage value at the end of year IS: $80.000(a) What is the projected IRR on this investment?(b) If Merco·s MARR is known to be 18%. is this investment justifiable'?
Merco, Inc .. a machinery builder in Louisville. Kentucky. is considering making an investment of $ 1.250,000 in a complete structural-bcam-lubrication system.
The increased productivity resulting from the installation of the drilling system
is central to the project's justification. Merco estimates the following figures as a basis for calculating productivity:
• Increased fabricated-s teel production: 2,000 LOns/year
• Average sales price per ton of fabricated steel: $2,566.50
• Labor rate:$ I 0.50/hour
• Tons of steel produced in a year: LS.000
• Cost of steel per ton (2 .205 lb):$ 1.950
• Number of workers on the layout. hole making. sawing, and material handling: 17
• Additional maintenance cost: $128.500/year
With the cost of steel at S 1.950 per ton and the direct-labor cost of fabricating l lb at 10 cents. the cost of producing a ton of fabricated steel is about $2. 170.50. With a selling price of $2.566.50 per ton. the resulting contribution to overhead and profit becomes $396 per ton. Assuming that Merco will be able to sustain an increased production of 2.000 tons per year by purchasing the system. the projected additional contribution has been estimated to be 2.000 tons X $396 = $792.000.
Since the drilling system has the capacity to fabricate the full range of structural steel. two workers can run the system. one operating the saw and the other operating the drill. A third worker is required to operate a crane for loading and unloading materials. Merco estimates that to perform equivalent work with a conventional manufacturing system would require, on average, an additional 14 people for center punching, hole making with a radial or magnetic drill. and materi al handling. ~n1i s factor translates into labor savings in the amount of $294.000 per year ( 14 x $10.50 x 40hours/week x 50wceks/ycar). The system can last for 15 years with an estimated after-tax salvage value of $80.000. However. after nn annual deduction of $226.000 in corporate incom<.: taxes. the net investment costs. as well as savings, are as follows:
• Project investment cost:$ L.250.000
• Projected annual net savings:
( $792.000 + $29-t.000) - $128.500 - $226.000 = $73 1.500
• Projected after-tax salvage value at the end of year IS: $80.000
(a) What is the projected IRR on this investment?
(b) If Merco·s MARR is known to be 18%. is this investment justifiable'?
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