A large automobile manufacturing company is considering the installation of a high-tech handling system. The initial cost of the system is $3,000,000 and it is estimated it will save $750,000 per year in manual labor, and will incur $27,500 in operating expense the first year increasing by $100 per year for every year thereafter. The salvage value at the end of the system’s 10 year life will equal the cost of removal. The company’s hurdle rate (MARR) is 12%.
1. Show your cash flow diagram from the company’s perspective.
2. Should the system be recommended for investment? Show all your work and detail your reasons that support your recommendation.
3. If this project was externally funded and the external financing rate, ?, was 15%, use the external rate of return methodology to solve for ERR. Do you still recommend this project? Detail your reasons that support your recommendation.