Add a cash flow diagram to it and a detailed solution and show the formula you u
ID: 1200260 • Letter: A
Question
Add a cash flow diagram to it and a detailed solution and show the formula you used
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
Alternative Economy
Deluxe
Regular
First Cost
$75,000
$220,000
$125,000
Annual Benefit
$28,000
$79,000
$43,000
M&O Costs
$8,000
$16,000
$6,900
Salvage Values
$3000
0
0
All machines have a life of ten years. Using incremental rate of return analysis, which alternative should the company choose? Use a MARR of 15%.
Alternative Economy
Deluxe
Regular
First Cost
$75,000
$220,000
$125,000
Annual Benefit
$28,000
$79,000
$43,000
M&O Costs
$8,000
$16,000
$6,900
Salvage Values
$3000
0
0
Explanation / Answer
Ans
Option 1
Alternate Economy
Initial Investment- $75000
Total Earning- $ (28000-8000+3000)
= $ 230000
Returns - 23000/75000*100 = 30.60%
Option 2 Deluxe
Intial Investment = $ 220,000
Returns - $(79000- 160000) = $63000
Return rate - 63000/220000"100 = 28.63%
Option 3 Regular
Initial Investment -- $ 1250000
Returns - $ (43000-6900) = 36100
Actual returns- 36100/125000*100 = 28.88%
Conclusion - Out of three options MARR is highest at option one Alternate Economy - 30.66% so company should go with Alternative Economy
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