Audrey Raines, P.Eng. is a project engineer at an electronics company. She is evaluating replacing one...

Audrey Raines, P.Eng. is a project engineer at an electronics company. She is evaluating replacing one of the plant’s manual assembly lines with automated equipment. The project is expected to cost $500,000 but will have savings of $100,000 per year in labour and $20,000 per year due to quality improvements. If the company’s MARR is 8% and the project’s life is 6 years, what is the external rate of return? Should Audrey go ahead with this project?

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Expert Solution

Initial cost = $ 500,000

Annual saving = $ 100,000 + $ 20,000 = $ 120,000 per year

MARR = 8%

Useful life = 6 years

We are required to determine the External rate of return. Convert the cost into present value and saving into terminal value.

PV of cost = $ 500,000

Future value of saving is

Now the external rate of return can be determined as follows

External rate of return = 8.68 %

The external rate of return is greater than the MARR are therefore the company should go ahead with the project.

Please contact if having any query will be obliged to you for your generous support. Your help mean alot to me, please help. Thank you

Rahul Sunny answered 1 year ago

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