Question

8. Andrews Manufacturing offers three models for one of its products to its customers. You have been asked to analyze the choices from the customer's perspective. Which model should a customer choose 19 if each model has a life of 12 years? Doing nothing is an alterative. Alternative Deluxe Regular Economy First cost $220,000 $125,000 $75.000 Annual benefit 79,000 43.000 28.000 Maintenance and operating cost 38,000 13,000 8,000 Salvage value 16,000 6,000 3.000 (a) Construct a choice table for interest rates from 0 to 100% () MARR - 15% Using incremental rate of reum analysis, which alternative, if my should the customer choose! - alter Warhice has a wear life

Answer 1

A. The choice table is given below.

O< 6.32% 17.23% Choice Table Deluxe Regular Economy <=6.32% <=17.23% <=24.88%

The way we calculate choice table is this way (Ive attached the excel file with calculations at the end of the table)-

First we calculate the IRR for each of the options. These turn out to be 15.54%, 21.88% and 24.88% for option Deluxe, Regular and economy, respectively. Shown below

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 IRR Cashflows Deluxe Regular economy -220000 -125000 -75000 41000 30000 20000 41000 30000 20000 41000 30000 20000 41000 30000 20000 41000 30000 20000 41000 30000 20000 41000l 30000 20000 41000 30000 20000 41000 30000 20000 41000 30000 20000 41000 30000 20000 57000 36900 23000 15.54% 21.88% 24.88%

Now, we are given that interest rate is from 0 to 100%. We will need to calculate NPW at each of these rates and see where each of the option become negative NPW. This in graphical form gives us good idea about how the options moves with rates and where they cross 0.

Finally, we calculate the incremental cashflow. Incremental cashflow is one cashflow minus another, to see if their difference gives us positive IRR. When we calculate Deluxe-Regular, we get IRR of 6.32%. When we calculate Regular-Economy, we get 17.23%. So, deluxe is choice if interest rate below 6.32%, regular is choice from 6.32% to 17.23%. From 17.23% to 24.88% (which is the IRR of economy, post which even that would become 0), economy is the choice. The incremental cashflows are below.

D-R Incremental Cashflow R-E Year o -95000 -50000 Year 1 11000 10000 Year 2 11000 10000 Year 3 11000 10000 Year 4 11000 10000 Year 5 11000 10000 Year 6 11000 10000 Year 7 11000 10000 Year 8 11000 10000 Year 9 11000 10000 Year 10 11000 10000 Year 11 11000 10000 Year 12 20100 13900 IRR 6.32% 17.23%

b. Since the MARR is 15%, we can choose both Regular or Economy.

The excel with calculations can be downloaded from here- https://drive.google.com/open?id=1Z8D7XommE5tvQug3Zaq5qjP4pM1Yng6p