ECONOMIC DECISION TO MOVE MANUFACTURING

PLANT FROM CHICAGO TO A NEW LOCATION

By:
Instructor: Dr. Hiral Shah Sushmitha Bethi
St. Cloud State University, Akash Joshi
Plymouth Rashmi Madki
EM 632 - Engineering Economy Sumit Rai
Harika Thota
 PROBLEM DEFINITION

■ A firm is considering moving its manufacturing plant from Chicago to a new location.
■ The Engineering department was asked to identify the various alternatives together with
the costs to relocate the plant and the benefits. The engineers examined six sites(Denver,
Dallas, San Antonio, Los Angeles ,Cleveland, Atlanta)
■ Engineering department has an alternative of keeping the plant at its present location.
BACKGROUND INFORMATION

Uniform Annual
Plant Location First Cost ($000s) Benefit($000s)
Denver $300 $52
Dallas $550 $137
San Antonio $450 $117
Los Angeles $750 $167
Cleveland $150 $18
Atlanta $200 $49
Chicago 0 0
 ASSUMPTIONS AND ANALYSIS METHODOLOGIES

The annual benefits are expected to be constant over the 8-year analysis period.
(a) Construct a choice table for interest rates from 0% to 100%.
(b) If the firm uses 10% annual interest in its economic analysis, where should the
manufacturing plant be located?
 DEFINITIONS

■ Interest rate : It is a percentage that is periodically added to an amount of money over

a specified length of time. If money is borrowed the interest rate is the percentage of
the borrowed amount that is paid to the borrower as a compensation for the use of the
borrowed property.
■ Present Worth: It is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time.
 ECONOMIC ANALYSIS METHOD

■ Present worth(PW)= -first cost+ Uniform

Uniform Annual benefit(P/A,i,N) Annual Present
Plant Location First Cost Benefit (P/A,10%,8) worth(PW)
Denver $300.00 $52.00 5.3349 ($22.59)
Dallas $550.00 $137.00 5.3349 $180.88
The firm should move to Dallas, since
Dallas has the highest present worth at San Antonio $450.00 $117.00 5.3349 $174.18
10% and 8-year period Los Angeles $750.00 $167.00 5.3349 $140.93
Cleveland $150.00 $18.00 5.3349 ($53.97)
Altlanta $200.00 $49.00 5.3349 $61.41
Chicago $0.00 $0.00 5.3349 $0.00
 SUMMARY
■ Used presente Worth to determine where should the manufacturing plant be shifted.
■ Concluded that moving manufacturing plant from Chicago to Dallas is the solution with
10% annual interest and 8-year analysis period
 REFERENCES

■ Eschenbach T.G.( 2011)Engineering Economy:Applying Theory to Practice. 3rd ed.

Oxford University Press: New York.

■ https://www.google.com/search?q=present%2Bvalue
%2Bdefinition&oq=prese&aqs=chrome.0.69i59l3j0j69i57j69i61l3.3245j1j7&sourceid=c
hrome&ie=UTF-8, Google Search,02April20202