1-Make-to-Specs is a software system under development by ABC Corporation. It will be able
to translate digital versions of three-dimensional computer models, containing a wide variety
of part shapes with machined and highly finished (ultra smooth) surfaces. The product of the
system is the numerically controlled (NC) machine code for the part's manufacturing.
Additionally, Make-to-Specs will build the code for the superfine finishing of surfaces with
continuous control of the finishing machines.
Information
Two alternative computers can provide the server function for the software
interfaces and shared database updates on the manufacturing floor while Make-to-Specs is
operating in parallel mode. The server’s first cost and estimated contribution to annual net
cash flow are summarized below
Solution:
Let us carry out the analysis assuming 3-year life for server 1 and 5 years life
for server 2
Part a:
T
Year
A
B
PW1=A/(1+12%)^T PW2=B/(1+12%)^T
Cash Flow
Server 1
Cash Flow
Present Worth of
Present Worth of
Server 2
server 1 @ 12%
server 2 @ 12%
MARR
MARR
0
-100000
-200000
-100000.00
-200000.00
1
-35000
50000
31250.00
44642.86
2
35000
55000
27901.79
43845.66
3
35000
60000
24912.31
42706.81
4
65000
0.00
41308068
5
70000
0.00
39719.88
Net PresentWorth -15935.91
12223.89
Annual Worth
function
=-15935.91*(A|P, 12%, 3)
=12223.89*(A|P, 12%, 5)
Annual Worth factor
0.416349
0.277410
Annual Worth
-6634.90
3391.03
We can see above: On the basis of PW, Server 2 must be chosen; and on the basis of AW as
well, server 2 must be chosen
Part b :
T
Year
A
B
I=B-A
Cash
Flow
Server 1
Cash Flow
Incremental cash flow
Present worth of
(B-A)
incremental cash
Server 2
PW=I/(1+20.12%)^T
flow @ RoR 20.12%
0
-100000
-200000
-100000.00
-1000000.00
1
-35000
50000
15000
12488.03
2
35000
55000
20000
13862.31
3
35000
60000
25000
14426.08
4
0
65000
65000
31226.57
5
0
70000
70000
27997.01
Net Present
0.00
Worth of
Incremental
cash flow
at RoR
20.12%
(must be
zero)
Since RoR of 20.12% of incremental cash flow above is greater than 12% MARR, server 2 must
be chosen.
Part c:
T
B2
Year
B1
Cash
Cash
Flow
Flow
Server 2
with 8
year life
I=B1-B2
PW=I/(1+1500%)^T
Incremental cash flow
(B-A)
Present worth of
Server 2
incremental cash
flow @ RoR 1500%
with 5
year life
0
-200000
-200000
0
0.00
1
50000
50000
0
0.00
2
55000
55000
0
0.00
3
60000
60000
0
0.00
4
65000
65000
0
0.00
5
70000
70000
0
0.00
6
0
70000
70000
0.00
7
0
70000
70000
0.00
8
0
70000
70000
0.00
Net Present
0.00
Worth of
Incremental
cash flow
at RoR
1500%
(must be
Zero
Even though it looks surprising, but all we can say is it's any time better to use
server 2 for 8 years than for 5 years
2- The life estimates were developed by two different individuals: a design engineer and a
manufacturing manager. They have asked that, at this stage of the project, all analyses be
performed using both life estimates for each system. Case Study Exercises Use spreadsheet
analysis to determine the following:
1 -If the MARR = 12%, which server should be selected? Use the PW or AW method to make
the selection.
2- Use incremental ROR analysis to decide between the servers at MARR = 12%.
3- Use any method of economic analysis to display on the spreadsheet the value of the
incremental ROR between server 2 with a life estimate of 5 years and a life estimate of 8
years
Solution:
Now, let us carry out the analysis assuming 5 years' life for server 1 and 8 years' life for server 2
T
Year
B2
B1
Cash Flow Cash Flow
Server 1
Server 2
I=B1-B2
PW=I/(1+1500%)^T
Present Worth of
Present Worth of
server 1 @ 12%
server 2 @ 12%
MARR
MARR
0
-100000
-200000
-100000.00
-200000.00
1
35000
50000
31250.00
44642.86
2
35000
55000
27901.79
43845.66
3
35000
60000
24912.31
42706.81
4
35000
65000
22243.13
41308.68
5
35000
70000
19859.94
39719.88
6
70000
35464.18
7
70000
31664.45
8
70000
28271.83
26167.17
Net
107624.34
Present
Worth
Annual Worth function
=26167.17*(A|P,12%, 5)
=107624.34*(A|P, 12%, 8)
Annual Worth factor
0.277410
0.201303
Annual Worth
7259.03
21665.09
We can see above: On the basis of PW, Server 2 must be chosen; and on the
basis of AW as well, server 2 must be chosen
Part b :
Since RoR of 6.91% of incremental cash flow above is less than 12% MARR,
server 1 must be chosen