Leonard Motors is trying to increase its international export business. It is considering several alternatives. Two were available earlier (per Problem 5.11), but a new one has recently been proposed by a potential internationally partnering corporation, which has funds to invest.

Option 1: Equipment costs $900,000 now and another $560,000 in 2 years
Annual M&O costs of $79,000
Life of project is 10 years
Salvage value is nil

Option 2: Subcontract production for annual payment of $280,000 for years 0 (now) through 10
Annual M&O cost is zero
Life of project is 10 years
Salvage value is nil

Option 3: Costs are $400,000 in year 1 plus an additional 5% each year through year 5
Revenues are $50,000 per year for years
6 through 10
Life of project is 10 years
Equipment Salvage value is $100,000
paid in year 10 by international partner

Due to stock market pressures, Leonard plans to change its MARR from its current 20% per year to 15% per year, compounded quarterly. Use PW analysis to select the best of the three options.

Problem 5.11

Leonard, a company that manufactures explosionproof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a significant Salvage value. Use a present worth analysis to determine which option is more attractive at the company’s MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.)