Answer to Question #244928 in Civil and Environmental Engineering for Alan Enrico V Tuib

Question

A large automobile manufacturer is considering the installation of a high-tech material handling system
for $30,000,000. This system will save $7,500,000 per year in manual labor, and it will incur $2,750,000
in annual operating and maintenance expenditures. The salvage value at the end of the system’s 10-
year life is negligible. If the company’s hurdle rate (MARR) is 10% per year, should the system be
recommended for implementation?

Answer 1

The Net Present Value (NPV) method for evaluating a project requires all cash flows to be converted to their present values using the company's minimum acceptable rate of return (MARR). The NPV is the sum of all present values and must be greater than zero to be acceptable.

The answer is No. I do not recommend the system for implementation because the NPV is -$813,306.25 which means it does not meet the MARR for the 10%