What assumptions must be made to compare the two options

Reference no: EM13183264

Beasley World Industries has a division that makes air conditioners. They face a three-year deadline to eliminate their current technology due to the chilling technique they use. There is a near-term solution that may be done (1) and a longer-term option (2) they can consider.

Option 1. Retrofit their plant immediately to adopt the new solution. Due to problems in their plant, costs will likely go up while the staff is learning the new technology.

Option2. Defer the retrofit until three years from now. They anticipate cheaper operation but less revenue due to increased competition.

ption 1 Option 2

Investment timing Now 3 years from now

Initial Investment $6 million $5 million

System life 8 years 8 years

Salvage Value $1 million $2 million

Annual revenue $15 million $11 million

Annual O&M costs $6 million $7 million

Answer the following:

a) What assumptions must be made to compare the two options?

b) If Beasley World uses a MARR of 15%, what should they do based on an IRR analysis? Why?

c) Does your answer change if their MARR changes to 10%? Why?

Reference no: EM13183264

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