Question

The STORE Company is considering the acquisition of a materials handling system to increase the productivity of their existing warehouses. Three alternatives (A, B and C), plus the Do Nothing alternative are being considered. The required initial investment for each alternative is $405,000 for A, $380,000 for B and $360,000 for C. If STORE uses a MARR of 12%, which alternative should be selected? Show your work.

	DN	A	B	C
A	19%	--------------
B	21%	10%	--------------
C	20%	16%	25%	-------------

Answer 1

First alternatives have to be arranged in increasing order of their initial cost

Alternative in increasing order of initial cost: C<B<A

Now each alternative will be compared with DN option if their ROR is more than MARR, alternative would be selected

As each alternative has ROR greater than MARR, each alternative would qualify

Now analysis of (B-C) would be done, if ROR of (B-C) is more than MARR, B would be selected

We see from table ROR of (B-C) is more than MARR, so alternative B is selected, C is rejected

Now we do analysis for (A-B), we see ROR is less than MARR, so A is rejected and B is selected

Therefore B should be selected as per ROR analysis