Question

Given the following time events and incremental cash flow, if the MARR is 12% per year, which alternative should be selected on the basis of rate of return? Assume Machine B requires the extra $8,000 initial investment. (You can use Excel).

Year

Incremental Year Cash Flow
$(Machine B-A)

0

-8,000

1 - 4


1,000

5 - 7

2,500

8

6,000

Select neither A nor B and go with DN

The "Incremental ROR" is less than MARR, so select machine B

The "Incremental ROR" is more than MARR, so select machine B

The "Incremental ROR" is less than MARR, so select machine A

Answer 1

Solution and Explanation:

Rate of Return (ROR) Analysis:

`=-8000+1000(\mathrm{P} / \mathrm{A}, \mathrm{i}, 4)+2500(\mathrm{P} / \mathrm{A}, \mathrm{i}, 3)+6000(\mathrm{P} / \mathrm{f}, \mathrm{i}, 8)` = 0

By trial and error method i= 15%

Since this is greater than MARR (12%).

The extra investment is justified, and machine B can be selected

Note: Trial and Error can be found on excel by just giving the cashflows and trying the IRR formula. it will directly give the rate of return or manually IRR can be calculated.

Thus, the option C is correct answer.

The "Incremental ROR" is less than MARR, so select machine A