Three different products are manufactured in an existing batch process. The details are as follows:

The cost of manufacturing is $0.95 million/y. The demand for these products is increasing, and the crystallization step has been determined to be the bottleneck to increasing the capacity. It is desired to add 25% capacity to this process. The internal hurdle rate for process improvements is 17% p.a. over five years.

If a new batch crystallizer, which allows for a 25% capacity increase, costs $750,000, do you recommend this process improvement?

Capital funds are tight, and it has been determined that the maximum investment possible is $600,000, resulting in a smaller new crystallizer. Using this crystallizer, identical profitability as found in Part (a) has been determined. Determine what capacity increase results from purchasing the smaller crystallizer.

Suppose that it is now possible to purchase the $750,000 crystallizer, thereby increasing capacity by 25%. However, the purchase of this crystallizer requires that the DCFROR (for this incremental investment) be at least 40% over five years. Is this DCFROR reached?

Transcribed Image Text:

Productkg/batchProduct Value (S/kg) Batches/y 5000 2500 4000 A B C 7.5 6.25 5.75 20 13 16