Three alternatives have the following cost and annual benefit data associated wi

Question

Three alternatives have the following cost and annual benefit data associated with them Alt. 1 Alt. 2 10 Alt.3 10 Data Useful Life, Years 10 First Cost Annual Benefit Annual M&O; Costs 195,000 97,000 AnnualM&O; Gradient 2,300 2,100 Salvage Value Loan Payment The loan payments are calculated using an interest rate of 10% a life equal to the life of the machine, and a down payment of 30%. Use a MARR of 12% and determine which machine, if any, should be purchased. Use incremental rate of return for your analysis. Do not forget to use DN in the analysis S1,325,000 S1,980,000 $1,650 265,000 589,000 435,000 91,000 1,980 145,000 205,000 178,000 150,946 225,565 187,971

Explanation / Answer

Data Alt 1 Alt 2 Alt 3 MARR 12% Useful Life, Years 10 10 10 DN in analysis First Cost 1325000 1980000 1650000 Annual Benefit 265000 589000 435000 Annual M & O Costs 95000 97000 91000 Annual M & O Gradient 2300 2100 1980 Salvage Value 145000 205000 178000 Loan Payment 150946 225565 187971 397500 594000 495000 927500 1386000 1155000 Year Alt 1 Alt 3 Alt 2 Incremental 0 -397500 -495000 -594000 -99000 1 265000 -95000 -150946 19054 156029 266435 110406 2 265000 -97300 -150946 16754 154049 264335 110286 3 265000 -99600 -150946 14454 152069 262235 110166 4 265000 -101900 -150946 12154 150089 260135 110046 5 265000 -104200 -150946 9854 148109 258035 109926 6 265000 -106500 -150946 7554 146129 255935 109806 7 265000 -108800 -150946 5254 144149 253835 109686 8 265000 -111100 -150946 2954 142169 251735 109566 9 265000 -113400 -150946 654 140189 249635 109446 10 265000 -115700 -150946 145000 143354 316209 452535 136326 IRR -6.61% IRR 111.37% IRR(J14:J24) Year Alt 2 0 -594000 1 589000 -97000 -225565 266435 2 589000 -99100 -225565 264335 3 589000 -101200 -225565 262235 4 589000 -103300 -225565 260135 5 589000 -105400 -225565 258035 6 589000 -107500 -225565 255935 7 589000 -109600 -225565 253835 8 589000 -111700 -225565 251735 9 589000 -113800 -225565 249635 10 589000 -115900 -225565 205000 452535 IRR 43.34% Year Alt 3 0 -495000 1 435000 -91000 -187971 156029 2 435000 -92980 -187971 154049 3 435000 -94960 -187971 152069 4 435000 -96940 -187971 150089 5 435000 -98920 -187971 148109 6 435000 -100900 -187971 146129 7 435000 -102880 -187971 144149 8 435000 -104860 -187971 142169 9 435000 -106840 -187971 140189 10 435000 -108820 -187971 178000 316209 IRR 28.89% Conclusion: since Alt 1 has negative Rate of return it is excluded Alt 2 has incremental IRR of 111.37%, hence should be selected

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