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.
Option 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?