Modern Medical Mechanics (M 3 ) chooses one major upgrade to implement in their

Question

Modern Medical Mechanics (M3) chooses one major upgrade to implement in their production facility each year. The choice is made based only on the internal rate of return criterion. The forecasted cash flows for five alternatives are shown below. If M3 uses a MARR of 15%, which alternative should be selected? Investment in Year 0 1 2 3 A Pharmaceutical robots ($675,000) $280,000 $305,000 $360,000 B X-ray quality inspection ($950,000) $350,000 $400,000 $600,000 C Security System Upgrades ($575,000) $225,000 $250,000 $400,000 D Warehouse automation ($700,000) $275,000 $300,000 $350,000 E CNC lathe ($350,000) $100,000 $150,000 $250,000 Modern Medical Mechanics (M3) chooses one major upgrade to implement in their production facility each year. The choice is made based only on the internal rate of return criterion. The forecasted cash flows for five alternatives are shown below. If M3 uses a MARR of 15%, which alternative should be selected? Investment in Year 0 1 2 3 A Pharmaceutical robots ($675,000) $280,000 $305,000 $360,000 B X-ray quality inspection ($950,000) $350,000 $400,000 $600,000 C Security System Upgrades ($575,000) $225,000 $250,000 $400,000 D Warehouse automation ($700,000) $275,000 $300,000 $350,000 E CNC lathe ($350,000) $100,000 $150,000 $250,000

Explanation / Answer

IRR is the discount rate at which PV of Cash Inflow is equal to PV of cash outflow

Using Excel formula

IRR = irr(values)

Pharmaceutical robots

IRR = irr({-675000,280000,305000,360000})

IRR = 18.04%

X-ray quality inspection

IRR = irr({-950000,350000,400000,600000})

IRR = 17.94%

Security System Upgrades

IRR = irr({-575000,225000,250000,400000})

IRR = 21.76%

Warehouse automation

IRR = irr({-700000,275000,300000,350000})

IRR = 14.68%

CNC lathe

IRR = irr({-350000,100000,150000,250000})

IRR = 17.17%

Decision : Security System Upgrades alternative should be selected as its IRR is higher among all alternative

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