PPC, Inc. uses a minimum attractive rate of return of 12% per year compounded se

Question

PPC, Inc. uses a minimum attractive rate of return of 12% per year compounded semiannually. The company is evaluating two new processes for expanding its manufacturing operations. The cash flows associated with each process are shown below. In evaluating the processes on the basis of a rate of return analysis, the incremental investment rate of return equation to use is: First cost, $ Annual Cost, S/yr Salvage Value, S Life, years Alt I -420,000 -15,000 5,000 Alt J -520,000 -12,000 6,000 (a) 0-100.000 + 3.000(P/A,1,3) + 1000( P/F,i%,3) (b) 0--420.000-15.000(P/A,1,3) + 5,000(P/F,i%,3) (c) 0-520.000-12.000(PA,1,3) + 6.000(P/Fi%,3) (d) 0-100.000-3,000( P/A,1,3) + 1000(PF.i%,3) (e) 0-100.000 + 3.000(P/A.1.3)-1000(P/F,i%,3)

Explanation / Answer

Ans: 0 = -100,000 + 3,000(P/A, i, 3) + 1000(P/F, i, n)

Explanation:

Incremental cash flows are:

First cost = -520,000 - (-420,000) = -100,000

Annual cost = -12,000 - (-15,000) = +3,000

Salvage value = 6,000 - 5,000 = 1000

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