Polymer Molding, Inc. is considering two processes for manufacturing storm drains. Plan A involves conventional injection molding that will require making a steel mold at a cost of $2 million. The cost for inspecting, maintaining, and cleaning the molds is expected to be $60,000 per year. Since the cost of materials for this plan is expected to be the same as for the other plan, this cost is not included in the comparison. The salvage value for plan A is expected to be 10% of the first cost. Plan B involves using an innovative process known as virtual engineered composites wherein a floating mold uses an operating system that constantly adjusts the water pressure around the mold and the chemicals entering the process. The first cost to tool the floating mold is only $795,000, but because of the newness of the process, personnel and product-reject costs are expected to be higher than for a conventional process. The company expects the operating costs to be $85,000 for the first year and then decrease to $46,000 per year thereafter. There will be no salvage value with this plan. At an interest rate of 12% per year, which process should the company select on the basis of an annual worth analysis over a 3-year study period?
Polymer Molding, Inc. is considering two processes
for manufacturing storm drains. Plan A involves
conventional injection molding that will require
making a steel mold at a cost of $2 million. The
cost for inspecting, maintaining, and cleaning
the molds is expected to be $60,000 per year. Since
the cost of materials for this plan is expected to
be the same as for the other plan, this cost is not
included in the comparison. The salvage value for
plan A is expected to be 10% of the first cost. Plan
B involves using an innovative process known as
virtual engineered composites wherein a floating
mold uses an operating system that constantly adjusts
the water pressure around the mold and the
chemicals entering the process. The first cost to
tool the floating mold is only $795,000, but because
of the newness of the process, personnel and
product-reject costs are expected to be higher than
for a conventional process. The company expects
the operating costs to be $85,000 for the first year
and then decrease to $46,000 per year thereafter.
There will be no salvage value with this plan. At an
interest rate of 12% per year, which process should
the company select on the basis of an annual worth
analysis over a 3-year study period?
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