Question

You are the technology manager of a small construction firm and before the upcoming construction season you wish to make the argument that the use of nail guns can reduce costs and save the firmi money and time. To demonstrate this, you decide to use a benefit cost analysis on the three popular types of nail guns, namely the generic, name brand and professional units. The various costs and benefits of these tools are outlined below. Determine the tool with the best benefit-cost ratio and if this tool depreciates by 7% per year, what would the asset (the tool) be worth after its life expectancy of 5 years. Item Generic Name Brand Professional Nail Gun Cost $10,300.00 $15,850.00 $30,300.00 Revenue Increase $22,000.00 $30,000.00 $40,000.00 Increased Quality $3,000.00 $4,000.00 $6,000.00 Warranty Reduction $1,200.00 $1,500.00 $1,200.00 Labour Reduction $31,200.00 $31,200.00 $31,200.00 Training $1,800.00 $1,800.00 $1,800.00 Extra Insurance $1,500.00 $900.00 $300.00

Answer 1

The efficiency and effectiveness of a proposed investment may be assessed through befit -cost ratio analysis.Which is also known as PI(profitability index).

PI=Present value of cash flow/Initial investment.

1.Generic-10300/22000 = 2.13

2.Name brand - 30000/15850 = 1.89

3.Professional - 40000/30300 = 1.32

The tool with best benefit-cost ratio is Generic.

The asset would be worth $8384.2 if the tool is depreciated by 7% per year with life expectancy of 5 years.

ncy