Upon graduating from College, you have taken a job as a design analyst at Acme Widgets. Your first assignment is to evaluate two alternatives for improving efficiency in the production of anvils for one of Acme’s biggest clients, Wile E. Coyote. Both options have a useful lifetime of 15 years, because that is the estimated remaining lifetime for Acme’s anvil production facility. Acme uses a 10% per year MARR.

A basic reconfiguration of the assembly line will initially cost $9.8 million and require annual maintenance costs of $150,000. Once the line is reconfigured, the greater efficiency will result in savings of $1.6 million per year, relative to the current assembly process. The second option is a more extensive upgrade to the existing process. It would cost an additional $4.2 million in initial investment, compared to the basic reconfiguration. It also would cost an additional $75,000 in annual maintenance costs compared to the basic alternative. However, the second option is more fragile, meaning that the benefits degrade over time. In the first year after the more extensive upgrade is completed, it would produce $700,000 more in savings than the basic alternative. In each subsequent year, for the rest of the 15-year useful lifetime, the incremental benefits would decrease by $20,000 compared to the previous year.

a. What is the conventional benefit-cost ratio associated with the basic reconfiguration?

b. Is the more extensive upgrade option worth pursuing? To answer this question, you can either find the incremental benefit-cost ratio or the incremental present worth, but you must use incremental analysis to receive full credit. Note: the cash flows associated with the more extensive upgrade are already provided as incremental values.

c. You believe there is uncertainty in how much the incremental savings associated with the extensive upgrade would be reduced from year to year, so you decide to conduct a breakeven analysis. What is the maximum magnitude of this uniform gradient that would result in the more extensive upgrade being justified?

Answer rating: 100% (QA)

Solution a Benefit Cost ratio of basic reconfiguration PC Present Value of Cost 9800000 BENEFIT A An... View the full answer