Perform an engineering economics analysis to answer the question of whether the
ID: 1167559 • Letter: P
Question
Perform an engineering economics analysis to answer the question of whether the investment in a conveyor system to facilitate more crossdocking in a distribution center is economically justified.
The conveyor system would consist of 2,000 feet of conveyor and is estimated to cost $750,000 initially and will cost $25,000/year in maintenance and other associated annual expenses.
The conveyor system is replacing part of the lift truck fleet that moves pallets from receiving to shipping. The incoming trailers are currently floor loaded, as are the outgoing trailers. This requires hand-stacking 2,000 cartons every day in receiving and de-stacking them in shipping. The labor associated with these two operations is estimated to be $120,000 annually (three workers). In addition, 10 lift trucks (and their associated operators) have been identified as not being needed if the conveyor system is installed. Lift trucks cost $30,000 initially and cost $2,500 in annual maintenance. The lift truck operators cost the company $35,000 annually.
Use a minimum attractive rate of return (MARR) of 20% and a 5-year time horizon to evaluate this question.
Explanation / Answer
Current costs:
Capital expenditure = $30,000 x 10 = $300,000
Operating expenditure = $35,000 x 3 + $2,500 x 10 + $120,000
= $(105,000 + 25,000 + 120,000) = $250,000
Proposed costs:
Capital expenditure = $750,000
Operating expenditure = $25,000
Incremental Costs/Benefits:
Incremental capital exp = $750,000 - $300,000 = $450,000
Incremental Benefits = Savings in current operating exp - proposed operating exp
= $(250,000 - 25,000) = $225,000 per year, for 5 years
So
NPV of incremental costs & benefits ($)
= - 450,000 + (225,000 x Present value interest factor of annuity, 20%, 5 years)
= - 450,000 + (225,000 x 2.9906 (From PVIFA table))
= 222,885
Since NPV > 0, the project should be undertaken.
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