engineering economics question, please show all steps
Initial cost = $ 200,000
Operation cost = $ 40,000
Annual increase in revenue = $ 40,000
Additional revenue = $ 20,000
The present worth of the cost is
PWc = 200,000 + 40,000(P/A,i%,6)
The present worth of income is
PW = 40,000/i + 20,000(P/A,i%,5) - 5,000(P/G,i%,5)
The present worth of cost and income must be equal
200,000 + 40,000(P/A,i%,6) = 40,000/i + 20,000(P/A,i%,5) - 5,000(P/G,i%,5)
Simplifying the above equation we get
200 + 40(P/A,i%,6) = 40/i + 20(P/A,i%,5) -5(P/G,i%,5)
40i + 8i(P/A,i%,6) -4i(P/A,i%,5) +i(P/G,i%,5) = 8
Let us assume i = 12%
LHS = 7.7842
Now assume i = 13%
LHS = 8.3319
Now through linear interpolation we get
IRR = 12 + (13 -12 ) ×(8 - 7.7842)/(8.3319 - 7.7842)
IRR = 12 + 0.2158/0.5477
IRR = 12 + 0.39
IRR = 12.39%
Since, the IRR is less than MARR thus, the project is not beneficial.
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