Corporate finance

Polymer Molding, Inc., is considering two processes for manufacturing storm drains. Plan A involves conventional injection molding that will require making a steel mold at a cost of $2 million. The cost for inspecting, maintaining, and cleaning the molds is expected to be $5000 per month. Since the cost of materials for this plan is expected to be the same as for the other plan, this cost will not be included in the comparison. The salvage value for plan A is expected to be 10% of the first cost. Plan B involves using an innovative process known as virtual engineered composites wherein a floating mold uses an operating system that constantly adjusts the water pressure around the mold and the chemicals entering the process. The first cost to tool the floating mold is only $25,000, but because of the newness of the process, personnel and product-reject costs are expected to be higher than those for a conventional process. The company expects the operating costs to be $45,000 per month for the first 8 months and then to decrease to $10,000 per month thereafter. There will be no salvage value with this plan.

At an interest rate of 12% per year, compounded monthly, which process should the company select on the basis of an annual worth analysis over a 3-year study period?

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