An automaker is considering installing a three‐dimensional (3‐D) computerized styling system at a cost of $180,000 (including hardware and software). With the 3‐D computer modeling system, designers will have the ability to view their design from many angles and to fully account for the space required for the engine and passengers. The digital information used to create the computer model can be revised in consultation with engineers, and the data can be used to run milling machines that make physical models quickly and precisely. The automaker expects to decrease turnaround time by 35% for new automobile models (from configuration to final design). The expected saving is $350,000 per year. The training and operating and maintenance cost for the new system is expected to be $80,000 per year. The system has a five‐year useful life and can be depreciated as a five‐year MACRS class. The system will have an estimated salvage value of $5,000. The automaker’s marginal tax rate is 40%.
(a) Determine the annual cash flows for this investment.
(b) What is the return on investment for this project? The firm’s MARR is 12%.