Question: Valley Manufacturing wants to obtain the capability of doing heat treating inside their facility. (Currently they subcontract their heat treatment to another firm.) The company process engineer (an Industrial Engineer) has determined that the heat treatment operation will have the following costs and savings. If Valley Manufacturing uses an MARR of 12%, what is the present worth of the first 10 years’ of service?

Hint: Treat savings as a form of revenue.

Initial Cost (Purchase Price) $ 46,000

Installation 8,000

Operating and Maintenance (including Labor) 23,500, increasing 6% per year

Savings (Reduced Costs by Doing In-house) 35,000, increasing 2,500 per year

Salvage Value (at EOY10) 12,000