Acme Semiconductor is expanding its facility and needs to add equipment. There a

Question

Acme Semiconductor is expanding its facility and needs to add equipment. There are three process tools under consideration. You have been asked to perform an economic analysis to select the most appropriate tool to acquire. You have gathered the following information for evaluation. Each of these tools has a useful life of seven years. Acme's accounting staff has established a company-wide MARR of 7% per year. Which one of the process tools should be selected? Tool A Tool B Tool C Investment costs Annual expenses Annual revenue Market value IRR $56,000 $45,000 $80,000 $6,000 $8,600 $3,200 $18,250 $16,500 $20,400 $18,000 $3,750 $22,000 15.9% 6.9% 14.9% Click the icon to view the interest and annuity table for discrete compounding when ,-7% per year. Select all alternatives that according to their IRR value should be considered. Select all that apply A. Tool A B. Tool C C. Tool B D. None of the tools should be considered.

Explanation / Answer

The IRR method indicates that a project is cost effective that is, that the PVNB is greater than zero when the IRR is greater than the MARR.  If the MARR is the minimum acceptable rate at which a return on an investment would be considered favorable, then any investment for which the return is greater than MARR would be considered desirable. Any investment that is below MARR would be considered undesirable.

Thus Tool A and Tool C would be considered because the IRR's for tool A and tool C is greater than the minimum acceptable rateof return i.e. 7% per year.

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