Two mutually exclusive cost alternatives , Machine A and Machine B, are being ev
ID: 2556496 • Letter: T
Question
Two mutually exclusive cost alternatives, Machine A and Machine B, are being evaluated.
Given the following time events and incremental cash flow, if the MARR is 12% per year, which alternative (Machine A or Machine B) should be selected on the basis of the incremental rate of return analysis? Assume Machine B requires the extra $10,000 initial investment. (You can use Excel).
Year
Incremental Cash Flow ($)
(Machine B - Machine A)
0
-10,000
1 - 4
1,300
5 - 7
3,200
8
4,500
Question options:
The "Incremental ROR" is more than MARR so select, Machine A
The "Incremental ROR" is more than MARR, so select Machine B
Select neither A nor B and go with DN
The "Incremental ROR" is less than MARR, so select Machine A
Year
Incremental Cash Flow ($)
(Machine B - Machine A)
0
-10,000
1 - 4
1,300
5 - 7
3,200
8
4,500
Explanation / Answer
Answer = CALCULATION OF THE INCREAMENTAL PRESENT VALUE (Machine B - Machien A ) With MARR@ 12% Year Cash Flow PVF @ 12% Present Value 0 $ -10,000.00 1.0000 $ -10,000.00 1 $ 1,300.00 0.8929 $ 1,160.71 2 $ 1,300.00 0.7972 $ 1,036.35 3 $ 1,300.00 0.7118 $ 925.31 4 $ 1,300.00 0.6355 $ 826.17 5 $ 3,200.00 0.5674 $ 1,815.77 6 $ 3,200.00 0.5066 $ 1,621.22 7 $ 3,200.00 0.4523 $ 1,447.52 8 $ 4,500.00 0.4039 $ 1,817.47 Total Present Value $ 650.53 Answer = Option 2 = "Increamental ROR" is more than MARR , So select Machiene B
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