Schneeberger, Inc. is considering investing in one of two alternatives for incre

Question

Schneeberger, Inc. is considering investing in one of two alternatives for increasing the acceleration of its linear motor actuators. The first, alternative X, requires an initial investment of $175,000 and its cash flows exhibit an annual rate of return of i*x = 22%. The second, alternative Y, requires an initial investment of $110,000 and its cash flows have an annual rate of return of i*Y = 16%. Schneeberger’s MARR is 20% per year. Answer the following question What is the expected i*X-Y?

The rate of return on the increment is greater than 22% per year.

The expected i*X-Y is %.

Explanation / Answer

NPV for perpetual time period

NPV = Cash Flow / MARR

For alternative X, Annual Cash flow = $ 175,000 * 22% = $ 38500

NPVx = 38500/0.20 =192500

For alternative Y, Annual Cash flow = $ 110,000 * 16% = $ 17600

NPVy = 17600/0.20 =88000

Although question asked above have mileading statement ,like "Answer the following question What is the expectedi*X-Y?"

NPVx - NPVy = $ 104500

The rate of return on the increment is greater than 22% per year. The expected i*X-Y is %.

It seems MARR increased to 22% , in the case , NPVx = 175000 and NPVy = 80000

NPVx - NPVy = 95000.

In case of problem , please rewrite statement of question in comment , i'll provide new solution .

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