Question

A company is thinking of installing a computer-process control system in one of its plants. The plant is used about 40%of the time (or 3,500 operating hours per year) to produce a proprietary product. During the remaining 60% of the time, it is used to produce other specialty products. Annual production of the proprietary product amounts to 30,000 units and sell for $15 per unit. The proposed computer-process control system will cost $650,000 and is expected to provide the following specific benefits in the production of the proprietary product:

-The selling price of the product could be increased by $2 per unit because the product will be of higher quality.

-Production volumes will increase by 4,000 units , without any increase in the quantities of raw material or in production time.

-The number of process operators can be reduced by one per shift, which represents a savings of $25 per hour.

The new control system would result in additional maintenance costs of $53,000 per year and has an expected useful life of eight years. Although the system is likely to provide similar benefits in the production of the other specialty products manufactured in the plant, these benefits have not yet been quantified. If the company’s MARR is 15%, compute the present worth of the project.