If needed, use the interpolation technique if the compound interest tables do no

Question

If needed, use the interpolation technique if the compound interest tables do not provide the value of interest factors.

(3) You are considering two alternative plant layouts, Al and A2, to improve its current layout. The cash flows are shown below. The first costs represent the expenses of rearranging the current layout to the alternative new layout and the annual savings represent the reduction in the production costs of the new layout compared to the current layout. Using the internal rate of return as the decision criterion, what course of action do you recommend? Use MARR-10%. Data First Cost Annual Savings A1 $110,000 $12,500 A2 -$115,000 $15,000 Year 1 to o

Explanation / Answer

For IRR we need to have Cost equals Present Worth of Annual Savings

PW of Annual Savings A1=12500/r=110000

12500/110000*100=r=11.36%

PW of Annual Savings for A2=15000/r=115000

15000/115000*100=r=13.04%

Both are higher than MARR hence A2 should be chosen

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