The National Woodwork Company, a manufacturer of window frames, is considering replacing a conventional manufacturing system with a flexible manufacturing system (FMS). The company cannot produce rapidly enough to meet demands. One manufacturing problem that has been identified is that the present system is expected to be useful for another five years but will require an estimated $105,000 per year in maintenance, which will increase $10,000 each year as parts become more scarce. The current market value of the existing system is $140,000, and the machine has been fully depreciated.
The proposed system will reduce or entirely eliminate set-up times. Each window can be made as it is ordered by the customer, who phones the order into the head office where details then are fed into the company's main computer. These manufacturing details then are dispatched to computers on the manufacturing floor, which are, in turn, connected to a computer that controls the proposed FMS. This system eliminates the warehouse space and material-handling time that are needed when the conventional system is used.
Before the FMS is installed, the old equipment will be removed from the job shop floor at an estimated cost of $100,000. This cost includes needed electrical work on the new system. The proposed FMS will cost $ 1,200.000. The economic life of the machine is expected to be 10 years, and the salvage value is expected to be $120,000. The change in window styles has been minimal in the past few decades and is expected to continue to remain stable in the future. The proposed equipment falls into the seven-year MACRS category. The total annual savings will be $664,243: $12,000 attributed to a reduction in the number of defective windows, $511,043 from the elimination of 13 workers, $100,200 from the increase in productivity, and $41,000 from the near elimination of warehouse space and material handling. The O&M costs will be only $45,000, increasing by $2,000 per year. The National Woodwork's MARR is about 15%, and the expected marginal tax rate over the project years is 40%.
(a) What assumptions are required to compare the conventional system with the FMS?
(b) With the assumptions defined in part (a), should the FMS be installed now?