National Office Automation, Inc. (NOAI) is a leading developer of imaging systems, controllers, and related accessories. The

Question:

National Office Automation, Inc. (NOAI) is a leading developer of imaging systems, controllers, and related accessories. The company's product line consists of systems for desktop publishing, automatic identification, advanced imaging, and office information markets. The firm's manufacturing plant in Ann Arbor. Michigan consists of eight different functions: cable assembly, board assembly, mechanical assembly, controller integration, printer integration, production repair, customer repair, and shipping. The process to be considered is the transportation of pallets loaded with eight packaged desktop printers from printer integration to the shipping department. Several alternatives for minimizing operating and maintenance costs have been examined. The two most feasible alternatives are the following.
• Option 1: Use gas-powered lift trucks to transport pallets of packaged printers from printer integration to shipping. The truck also can be used to return printers that must be reworked. The trucks can be leased at a cost of $5,465 per year. With a maintenance contract costing $6.317 per year, the will maintain the trucks. A fuel cost of $1,660 per year is expected. The truck requires a driver for each of the three shifts at a total cost of $58,653 per year for labor. It is estimated that transportation by truck would cause damages to material and equipment totaling $10,000 per year. 1
Option 2: Install an automatic guided vehicle system (AGVS) to transport pallets of packaged printers from printer integration to shipping and to return products that require rework. The AGVS, using an electrically powered cart and embedded wire-guidance system, would do the same job that the truck currently does, but without drivers. The total investment costs, including installation, are itemized as in Table ST 10.5.
NOAI could obtain a term loan for the full investment amount ($159,000) at a 10% interest rate. The loan would be amortized over five years with payments made at the end of each year. The AGVS falls into the seven-year MACRS classification, and it has an estimated service life of 10 years and no . If the AGVS is installed, a maintenance contract would be obtained at a cost of $20,000, payable at the beginning of each year. The firm's marginal tax rate is 35% and its is 15%.
TABLE STI0.5
Vehicle and system installation...................... $97,255
Staging conveyor....................................... 24,000
Power supply lines..................................... 5,000
Transformers............................................ 2,500
Floor surface repair..................................... 6,000
Batteries and charger................................... 10,775
Shipping.................................................. 6.500
Sales tax.................................................. 6,970
Total AGVS system cost................................ $159,000
(a) Determine the net cash flows for each alternative over 10 years.
(b) Compute the incremental cash flows (option 2-option 1), and determine the rate of return on this incremental investment.
(c) Determine the best course of action based on the rate-of-return criterion.
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