Reference no: EM132377923

ABC Inc is investigating the use of an automated machine to inspect the final product quality of their manufactured devices. The automated machine costs $17 million. It is available from the vendor in Florida in about two months. Costs of shipping from Florida is $50,000. Building modifications and installation costsare estimated at $130,000. Assume operating costs of the equipment is negligible. A trip to Florida for ABC Inc. folks to pre-inspect the automated machine costs $5,000.

Currently, ABC Inc. uses manual labor inspection. These workers cost an hourly wage of $35/hour. An inspector can inspect 7devices per hour, and the product manager estimates that he needs 16 inspectors to inspect the items and complete production on time. They work 8 hours per shift, and 200 shifts per year are required. ABC Inc sells about 170,000 devices per year at a sales price of $75 each to the wholesaler.

There is also a risk of false negatives (15%) from the manual inspection, so the company actually pays the workers $25/ hour and sets the other $10/hour to cover cost of poor quality. This contingency is considered a regular business expense. The automated machine has an extremely low false negative rate of 2%, so no cash reserve is anticipated to be needed.

ABC uses a planning horizon of four years and has a corporate MARR of 12%.

Need a pre-tax analysis of this situation.

Need a recommendation whether the company should buy the automated machines based on the calculations.