Question

Acme is considering purchasing a new vision system for their production line. The vision system would allow them to increase revenue due to improved quality and therefore reduced warranty expense. The initial cost of the system is $220,000, and the annual increase in net revenue is $45,000. Acme’s MARR is 15%. However, the life of the system is uncertain, with the probability of different asset lives in the following table. Given this information, should Acme purchase the vision system?

Useful life, years (M|8 9 10 11 12 1. p(N) 0.10 0.15 0.25 0.20 0.20 0.05 0.05

Answer 1

We need to compute the expected net Present value of the investment as

Initial cost + Sum of (PV of cash flows*Probability) at different useful lives

=Initial cost + Sum of (Annual cash flows * P/A(15%,n) * Probability)

= -220000+ 45000*4.487*0.1   +45000* 4.772*0.15 + 45000*5.019*0.25 +45000* 5.234*0.2 + 45000*5.421*0.2   +45000* 5.583*0.05 + 45000*5.724*0.05

=10202

Since the expected NPV is positive, the system must be purchased.