A Buisness is considering an investment in a numerical controlled milling machin

Question

A Buisness is considering an investment in a numerical controlled milling machine needed for a ten (10) year project life. Three alternatives are under consideration. The firm uses an 18% MARR. The cash flows of the alternatives are as follows:

5

Using incremental rate of return analysis, determine which alternative the firm should select.

A Buisness is considering an investment in a numerical controlled milling machine needed for a ten (10) year project life. Three alternatives are under consideration. The firm uses an 18% MARR. The cash flows of the alternatives are as follows:

Cash Flow A B C Initial Cost $22,000 $28,200 $23,000 O &M cost / year $2,650 $2,750 $1,100 Annual cost savings $7,500 $9,000 $7,500 Salvage value $5,825 $6,125 $8,000 Technical life - years 10 10

5

Using incremental rate of return analysis, determine which alternative the firm should select.

Explanation / Answer

Net savings for Machine A=$7,500-$2,650=$4,850

Net savings for Machine B=$9,000-$2,50=$6,250

Net savings for Machine C=$7,500-$1,100=$6,400

using internal return Machine B should be preferable

NPV-Machine A Year Cash flow PV@18% PV 0        -22,000      1.0000        -22,000 1            4,850      0.8475            4,110 2            4,850      0.7182            3,483 3            4,850      0.6086            2,952 4            4,850      0.5158            2,502 5            4,850      0.4371            2,120 6            4,850      0.3704            1,797 7            4,850      0.3139            1,523 8            4,850      0.2660            1,290 9            4,850      0.2255            1,093 10            4,850      0.1911                927 10            5,825      0.1911            1,113                909 NPV-Machine B Year Cash flow PV@18% PV 0        -28,200      1.0000        -28,200 1            6,250      0.8475            5,297 2            6,250      0.7182            4,489 3            6,250      0.6086            3,804 4            6,250      0.5158            3,224 5            6,250      0.4371            2,732 6            6,250      0.3704            2,315 7            6,250      0.3139            1,962 8            6,250      0.2660            1,663 9            6,250      0.2255            1,409 10            6,250      0.1911            1,194 10            6,125      0.1911            1,170            1,058 NPV-Machine C Year Cash flow PV@18% PV 0        -23,000      1.0000        -23,000 1            6,400      0.8475            5,424 2            6,400      0.7182            4,596 3            6,400      0.6086            3,895 4            6,400      0.5158            3,301 5            6,400      0.4371            2,797 5            8,000      0.4371            3,497                511

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.