A manufacturing company needs to install an enterprise resource planning (ERP) s

Question

A manufacturing company needs to install an enterprise resource planning (ERP) system for production planning and control. There are two systems they can choose from and both systems can be used for the indefinite future. System I has an installation cost of $150,000 now and an additional cost of $50,000 after 10 years. The annual maintenance cost is $5,000 for the first 5 years and $8,000 thereafter. In addition there is expected to be a recurring major upgrade cost of $15,000 every 12 years. System II has an annual maintenance cost $20,000 for the first 4 years and $16,000 thereafter. System II does not require an installation or upgrade cost. Help the company select the more economic system assuming i=5% per year.

Explanation / Answer

Command in excel is

NPV(5%, selection of total cost cells)

Present worth of cost is less for System II

Sysytem II is the best

System I 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Initial Cost 200000 Additional Cost 60000 Annual Maintenance 6000 6000 6000 6000 6000 8000 8000 8000 8000 8000 Additional Upgrade 13000 Total cost 200000 6000 6000 6000 6000 6000 8000 8000 8000 8000 68000 0 0 13000 Present worth of cost $296,843.90 System II 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Initial Cost 0 Annual Maintenance 25000 25000 25000 25000 25000 17000 17000 17000 17000 17000 17000 17000 17000 Total cost 0 25000 25000 25000 25000 25000 17000 17000 17000 17000 17000 17000 17000 17000 Present worth of cost $194,326.55

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