o on June 1, 1991-The bond ut the uHd &f; each six months. It is now June 1. 199

Question

o on June 1, 1991-The bond ut the uHd &f; each six months. It is now June 1. 1992. Thus, you have already received two $500 payments. The bond matures in five more years on May 31,1997 (a) What is the bond (or coupon) interest rate? (b) What is the bond worth today, if 10% is an acceptable value for M ARR? l $9,00 Question (B)-(35 points) The CROC Co. is considering a new milling machine. They have narrowed the choices down to three alternatives in addition to the Do Nothing Alternative First Cost Annual Benefit M&OCosts; Alternative Economy Deluxe $75,000 $28,000 Regular TSI 25,000 $220,000 $79,000 $16,000 0 $8,000 $6,900 Salvage Values All machines have a life of ten years. Using incremental rate of return analysis, which alternative should the company choose? Use a MARR of 10%. 153000

Explanation / Answer

We have the cash flows for increment

Find the NPV of increment (R - A)

= (-125000 + 75000) + (43000 - 6900 - 28000 + 8000)(P/A, i%, 10) + (0 - 3000)(P/F, i%, 10)

Trial and error gives range of interest 28% and 30%

Interpolation gives

IRR = 28% + (30% - 28%)*(2375.45/(2375.45 + 443.83)) = 29.69% . Since IRR > MARR we select R over A.

Similarly NPV of D - R gives

-95000 + 26900(P/A, i%, 10) = 0

Interpolation gives 25.36%. Since IRR for this increment is greater than MARR, we select D over R.

EOY A R D R-A D-R 0 -75000 -125000 -220000 -50000 -95000 1 20000 36100 63000 16100 26900 2 20000 36100 63000 16100 26900 3 20000 36100 63000 16100 26900 4 20000 36100 63000 16100 26900 5 20000 36100 63000 16100 26900 6 20000 36100 63000 16100 26900 7 20000 36100 63000 16100 26900 8 20000 36100 63000 16100 26900 9 20000 36100 63000 16100 26900 10 23000 36100 63000 13100 26900

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