Answer Happy

Using the internal rate of return (IRR) evaluation
method, determine which system Acme should purchase. (Report IRR to
two decimal places). Excel functions can be used.
Acme Corporation is going to buy a manufacturing system to
produce its shaft couplings over six years. It is considering two
types: the Cellular Manufacturing System (CMS) or the Flexible
Manufacturing System (FMS). Acme will only buy one.
There is no difference in the quantity or quality of output.
With either system, the firm will produce output of 544,000 units
per year. The output price today is $25 per unit, but prices are
expected to increase 5% per year over the life of the project.
Cellular Manufacturing System (CMS) The initial investment cost
of CMS is $8,000,000. CMS systems have a life of three years. The
price of new CMS systems is expected to increase 5% per year.
Today, three-year-old used CMS sell for $1,000,000. The price of
three-year-old used CMS systems is expected to increase 5% per year
as well.
Flexible Manufacturing System (FMS) The initial investment cost
of FMS is $5,000,000. FMS systems have a life of six years. Today,
a six-year-old used FMS sell for $400,000. The price of
six-year-old used FMS systems is expected to increase 5% per
year.
The annual equivalent operating costs for CMS and FMS are shown
in the table below.
Acme Corporation has a minimum acceptable rate of return (MARR)
of 15%.
Costs Annual labour costs Annual material costs Annual overhead costs Annual tooling costs Annual inventory costs Annual income taxes CMS FMS $707,200 $1,169,600 $598,400 $833,320 $1,950,000 $3,150,000 $300,000 $470,000 $31,500 $141,000 $1,650,000 $1,650,000