Question

8-18 0ZY, Inc. is evaluating new widget machine offered by three companies. The chosen machi A will be used for 3 years. Company Company Company A $25,000 400 $15,000 1,600 $20,000 900 First cost Maintenance and operating Annual benefit Salvage value 8,000 3,000 13,000 9,000 6.000 4,500 NOTE: MARR used is 15%. Use 4 years instead of 3 years. ("The chosen machine will be used for 4 years.") Solve for the following for each company machines: 1. Incremental ROR 2. Future Worth Analysis 3. Payback Period 4. Benefit Cost Ratio Analysis 5. Change the First Cost for Company B to $35,000 and re-calculate your answers for a d above.

Please show work on excel

Answer 1

1	Incremental ROR
	Company A							Company B							Company C
Year	First Cost	Maintenance	Benefit	Salvage	Total		Year	First Cost	Maintenance	Benefit	Salvage	Total		Year	First Cost	Maintenance	Benefit	Salvage	Total
0	-15000	0	0	0	-15000		0	-25000	0	0	0	-25000		0	-20000	0	0	0	-20000
1	0	-1600	8000	0	6400		1	0	-400	13000	0	12600		1	0	-900	9000	0	8100
2	0	-1600	8000	0	6400		2	0	-400	13000	0	12600		2	0	-900	9000	0	8100
3	0	-1600	8000	0	6400		3	0	-400	13000	0	12600		3	0	-900	9000	0	8100
4	0	-1600	8000	3000	9400		4	0	-400	13000	6000	18600		4	0	-900	9000	4500	12600
				IRR (Excel Formla= IRR(values))	29.7%						IRR	39.7%						IRR	27.5%

2. Future Worth Analysis

Company A							Company B							Company C
Future Worth Analysis :			FW of cash inflow - Future worth of cash outflow				Future Worth Analysis :			FW of cash inflow - Future worth of cash outflow				Future Worth Analysis :			FW of cash inflow - Future worth of cash outflow
	Net Annual Cash Benefit (A)	First Cost (B)	Scrap Value ( C )	FWA= A+C-B				Net Annual Cash Benefit (A)	First Cost (B)	Scrap Value ( C )	FWA= A+C-B				Net Annual Cash Benefit (A)	First Cost (B)	Scrap Value ( C )	FWA= A+C-B
	6400	15000	3000					12600	25000	6000					8100	20000	4500
FWA	31957.6	26235.09375	3000	8722.51			FWA	62916.525	43725.15625	6000	25191.37			FWA	40446.3375	34980.125	4500	9966.21

C, Payback Period

Pay Back Period
		Company A
	Investment ( A)	15000
	Annual Return (B)	6400
	Pay back Period ( A/B)	2.34
Pay Back Period
		Company B
	Investment ( A)	25000
	Annual Return (B)	12600
	Pay back Period ( A/B)	1.98

	Company C
Investment ( A)	20000
Annual Return (B)	8100
Pay back Period ( A/B)	2.47

4. Benefit Cost ratio Analysis

	Company A
	PV of cash inflow
	Benefit	PVF @ 15%	PV
1	6400	0.870	5565.22
2	6400	0.756	4839.32
3	6400	0.658	4208.10
4	9400	0.572	5374.48
		PV of cash inflow	19987.12
		Cash outlow	15000
		Benefit/ Cost Ratio	1.33

	Company B						Company C
	Benefit	PVF @ 15%	PV				Benefit	PVF @ 15%	PV
1	12600	0.870	10956.52			1	8100	0.870	7043.48
2	12600	0.756	9527.41			2	8100	0.756	6124.76
3	12600	0.658	8284.70			3	8100	0.658	5325.88
4	18600	0.572	10634.61			4	12600	0.572	7204.09
		PV of cash inflow	39403.25					PV of cash inflow	25698.21
		Cash outlow	25000					Cash outlow	20000
		Benefit/ Cost Ratio	1.58					Benefit/ Cost Ratio	1.28

5. Change to First Cost to 35000 of company B

Incremental ROR

	Company B
Year	First Cost	Maintenance	Benefit	Salvage	Total
0	-35000	0	0	0	-35000
1	0	-400	13000	0	12600
2	0	-400	13000	0	12600
3	0	-400	13000	0	12600
4	0	-400	13000	6000	18600
				IRR	20.7%

Future Worth Analysis

Company B
Future Worth Analysis :			FW of cash inflow - Future worth of cash outflow
	Net Annual Cash Benefit (A)	First Cost (B)	Scrap Value ( C )	FWA= A+C-B
	12600	35000	6000
FWA	62916.525	61215.21875	6000	7701.31

Payback Period

	Company B
Investment ( A)	35000
Annual Return (B)	12600
Pay back Period ( A/B)	2.78

Benefit to Cost Ratio :

	PV of cash inflow
	Benefit	PVF @ 15%	PV
1	12600	0.870	10956.52
2	12600	0.756	9527.41
3	12600	0.658	8284.70
4	18600	0.572	10634.61
		PV of cash inflow	39403.25
		Cash outlow	35000
		Benefit/ Cost Ratio	1.13