Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 29

The mechanical components division manager asks you to recommend a make/buy decision on a major automotive subassembly that is currently purchased externally for a total of $3.9 million this year. This cost is expected to continue rising at a rate of $300,000 per year. Your manager asks that both direct and indirect costs be included when in-house manufacturing (make alternative) is evaluated. New equipment will cost $3 million and will have a salvage of $0.5 million and a life of 6 years. Estimates of materials, labor costs, and other direct costs are $1.5 million per year. Typical indirect rates, bases, and expected usage are shown below. Perform the AW evaluation at MARR = 12% per year over a 6-year study period. Show both hand and spreadsheet solutions, as directed.