Chapter 06, Problem 045 The management of Brawn Engineering is considering three

Question

Chapter 06, Problem 045 The management of Brawn Engineering is considering three alternatives to satisfy an OSHA requirement for safety gates in the machine shop. Each gate will completely satisfy the requirement, so no combinations need to be considered. The first costs, operating costs, and salvage values over a 5-year planning horizon are shown below End of Year Gate 1 $15,000 $6,500 $6,500 $6,500 $6,500 $6,500 + $0 $5,600 + $2,000 -$4,000 $5,000 Gate 2 Gate 3 0 $19,000 $5,600 $5,600 $5,600 $5,600 $24,000 $4,000 $4,000 $4,000 $4,000 2 4 Show the comparisons and internal rates of return used to make your decision: Comparison 1: IRR 1 Comparison 2: IRR 2: Using an internal rate of return analysis with a MARR of 20%/year, determine the preferred gate Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2.

Explanation / Answer

End of year Gate 1 Gate 2 Gate 3 0 -15000 -19000 -24000 1 -6500 -5600 -4000 2 -6500 -5600 -4000 3 -6500 -5600 -4000 4 -6500 -5600 -4000 5 -6500 -5600 2000 -4000 5000 Note- Solved using Excel IRR Function Note- salvage value of year 5 is added to cash flow of year 5 Step 1- First we compare gate 1 & gate 2 , if irr of additional expense of gate 2 over gate 1 is less than 20% then gate 1 is prefered otherwise gate2 End of year Gate 1 Gate 2 Difference between Gate 2 & Gate 1 0 -15000 -19000 -4000 1 -6500 -5600 900 2 -6500 -5600 900 3 -6500 -5600 900 4 -6500 -5600 900 5 -6500 -3600 2900 15.10% IRR(D12:D17) Gate 1 is prefered, and now comparison between gate 1 and gate 3 End of year Gate 1 Gate 3 Difference between Gate 2 & Gate 1 0 -15000 -24000 -9000 1 -6500 -4000 2500 2 -6500 -4000 2500 3 -6500 -4000 2500 4 -6500 -4000 2500 5 -6500 1000 7500 22.04% IRR(D22:D27) Conclusion since gate 3 additional expense irr is more than 20% MARR, Gate 3 is selected

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