Mount Manufacturing Company produces industrial and public€safety shirts. As is done in most apparel manufacturing, the cloth must be cut into shirt parts in accordance with patterns marked on sheets of paper, which indicate the way that the particular cloth is to be cut. At present, these patterns are marked manually, and the annual labor cost of the process is running around $103,718. Mount has the option of purchasing one of two automated marking systems. The two systems are the Lectra System 305 and the Tex Corporation Marking System. The comparative characteristics of the two systems are as follows:

The firm€™s marginal tax rate is 40%, and the interest rate used for project evaluation is 12% after taxes.
(a) Based on the most likely estimates, which alternative is better?
(b) Suppose that the company estimates the material savings during the first year for each system on the basis of the following probability distributions:

Lectra System

Material Savings                     Probability 

$150,000....................................0.25

$230,000....................................0.40

$270,000....................................0.35

Tex System

Material Savings                     Probability 

$200,000....................................0.30

$274,000....................................0.50

$312,000....................................0.20

Further assume that the annual material savings for both Lectra and Tex are statistically independent. Compute the mean and variance for the equivalent annual value of operating each system.

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Most Likely Estimates Lectra System Tex System $51,609 $51,609 Annual labor cost Annual material savings $230,000 $274,000 $195,500 $136,150 Investment cost б уears Estimated life б уears $20,000 $15,000 Salvage value 5 year Depreciation method (MACRS) 5 year 5 year