Question

Exercise 2 A firm is considering which of two machines to install to reduce costs. Both machines have useful life of 5 years and no salvage value. Machine A costs 820.5 QAR and can be expected to result in 150 QAR savings first year increasing by 50 annually. Machine B costs 1,389 QAR and will provide savings of 300 QAR the first year increasing 50 QAR annually, making the second-year savings 350 QAR, the third-year savings 400 QAR and so forth. 1. Develop the cash flow series (Incremental Cash Flow Table). 2. Set up the present worth relation for the incremental ROR. 3. If the company's MARR is 9% per year, determine which machine should be selected based on incremental present worth ROR analysis? 4. Find the exact ROR.

Answer 1

ANSWER:

A)

YEAR	0	1	2	3	4	5
INITIAL COST	-568.5
SAVINGS		150	150	150	150	150
CASH FLOWS	-568.5	150	150	150	150	150

B) PW = INITIAL COST + CASH FLOWS(P/A,I,N)

PW = -568.5 + 150(P/A,I,5)

C) In order to find the incremental ror we will equate the pw to zero.

pw = -568.5 + 150(P/A,I,5)

0 = -568.5 + 150(P/A,I,5)

568.5 = 150(p/a,i,5)

568.5 / 150 = (p/a,i,5)

3.79 = (p/a,i,5)

solving via trial and error we get that i is 10% as seen from yhe compounding factor tables.

so machine b should be selected as the incremental irr is greater then the marr that is 10% > 9%