Question

A chemical company is considering two processes

for isolating DNA material. The incremental cash
flows between the two alternatives, J and S, have an
incremental rate of return that is less than 40%,
which is the MARR of the company. However, the
company CEO prefers the more expensive process
S. She believes the company can implement cost
controls to reduce the annual cost of the more
expensive process. By how much would she have to
reduce the annual operating cost of alternative S (in
S per year) for it to have an incremental rate of
retum of exactly 40%?
Incremental Cash Flow
(S - J), S
Year
-900,000
400,000
400,000
400,000
N-

Answer 1

Answer: $166.430 per year

Explanation:

0= -900000+AOC(P/A, 40%,3)

0= -900000+AOC(1.5889)

result we get

AOC= $566430

Require reduction = 566430-400000

result we get

$166.430 per year