The Company IIE Inc. is considering upgrading their distribution center (DC) and have received investment proposal from four different vendors. The budget limitation for the investment is $1 million. The investment proposals are listed in Table 1. Alternative 1 and 3 represents the implementation of RFID (which is the main goal of the investment) and are mutually exclusive; however one of them must be included in the project if it is approved. Alternative 2 is contingent on alternative 3. The company uses a MARR of 15%.
Proposal 1: (Initial Investment: $650,000), (salvage Value (%of investment): 20%), Life of Project: 10, Annual Operating Coast Year 1: 30,000, Incremental operating cost per year: 5,000, Savings Generated Year 1: 100,000, Incremental Savings (%) per year: 5%
Proposal 2: (Initial Investment: $300,000), (salvage Value (%of investment): 15%), Life of Project: 10, Annual Operating Coast Year 1: 6,000, Incremental operating cost per year: 700, Savings Generated Year 1: 200,000, Incremental Savings (%) per year: 3%
Proposal 3: (Initial Investment: $700,000), (salvage Value (%of investment): 25%), Life of Project: 10, Annual Operating Coast Year 1: 45,000, Incremental operating cost per year: 1,500, Savings Generated Year 1: 97,000, Incremental Savings (%) per year: 8%
Proposal 4: (Initial Investment: $350,000), (salvage Value (%of investment): 30%), Life of Project: 10, Annual Operating Coast Year 1: 8,000, Incremental operating cost per year: 1,000, Savings Generated Year 1: 205,000, Incremental Savings (%) per year: 6%
a) Using the ranking approach and PW, AW and FW as measures of performance, determine the preferred investment alternative.
b) Using the incremental approach and the IRR as the measure of performance, determine the preferred investment alternative