An existing assembly line utilizes 30 laborers and six maintenance technicians.
ID: 1124490 • Letter: A
Question
An existing assembly line utilizes 30 laborers and six maintenance technicians. You are considering the following two upgrade options regarding this assembly operation. For each option: Money may be borrowed for any purchase at 4.10% APR. Laborers cost $2400 per month in salary plus an additional 29% in fringe benefits. Maintenance technicians cost $4200 per month in salary plus an additional 35% in fringe benefits. Calculate the return on investment (ROI) for each option using monthly values.
Option A- Purchase hard automation that will be custom built for the assembly line and has a life expectancy of 8 years. The total cost of this system is $4,540,000. This option will reduce the total number of laborers to twelve and will only require three maintenance technicians. It has a scrap value of $60,000 at the end of its life.
Option B- Purchase soft automation, which consists of twelve programmable robotic cells from Fanuc. Each robotic cell will cost$196,000 and will have a life of five years. The total salvage value of all robotic cells at the end of the five-year period is $48,000. This option will require fifteen laborers, two maintenance technicians, and an additional service contract costing $6000 per month.
Option A- Hard automation:
Total M(costs):
Total M(savings):
Return on Investment (to two decimal places):
Option B-Soft Automation:
Total M(cost);
Total M(savings);
Return on Investment ( to two decimal places)
Based on ROI, which option should you purchase? A or B
If your company's minimum ROI is 40%, should you recommend the purchase to your manager? yes or no
Explanation / Answer
Answer:
1. Option A: Hard Automation.
M savings = $5,553,728.
M cost = $4,540,000.
Calculating for 8 years, we will get total Savings (M savings-M cost) = 1,013,728
Return on Investment (RoI) = 1,013,728/(4,540,000*8*12) = 0.23% per month.
2. Option B: Soft Automation
M savings at the end of 5 years = $3,795,020.
M cost = $ 196,000.
Total Savings at the end of 5 years = $3,599,020.
Return on Investment = 3,599,020/(196,000*12*8) = 19.13% per month.
S.No. Initial Cost Salvage Value Interest Cost Labor Savings Maintenance Technician Savings Total Savings 1. ($4,540,000) 60,000 ($186,140) $3096 per month $5,670 per month Total 3,096*18=$55,728 per month 5,670*3 = $ 17,010 per month 0.23% per monthRelated Questions
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