Question

Final Finishing is considering three mutually exclusive alternatives for a new polisher. Each alternative has an expected life of 10 years and no salvage value. Polisher 1 requires an initial investment of $20,000 and provides annual benefits of $4,465. Polisher 2 requires an initial investment of $10,000 and provides annual benefits of $1,770. Polisher 3 requires an initial investment of $15,000 and provides annual benefits of $3,580. MARR is 15%/year. Show the comparisons and internal rates of return used to make your decision: IRR 1: Comparison 1: Comparison 2: Comparison 3: IRR 2: IRR 3: Based on an internal rate of return analysis, which polisher should be recommended? Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is +0.2.

Answer 1

Answer: - Year Tblishert Iblisher Iblisher 2 IPU factor 15% PUAF/Profi IPOD 12 I PU T 0 1-20,000 -10,000 15,000 1 - 1-20,000/-10,000 1,000 tolo 14,465 / 1770 13,580 - 15.0187722488-8080 888-229/17,967-1966 for Polishert: NPU$ -20,000 + 22,408:80805) - $2,408.80805 Since NPU is positive, increase rate to 18% Year 1 Cashflow / 18% PUAF IPU @18% PU 0 - 20,000 120,000 to 10 4 4,465 4. ugyog - 120,066 11185 NPV = $(20,066.1185-20,000) $66.1185

Decrease in NPU $72408:80805-66-1185) - $2342.68955 Decrease in NPU Increase in discountio 2.342.68955 3% 2408.7634 3 x 2408.7634 234268955 = 3.08461 So, IRR = 115 +3.084615% no-cous un = 18.1 % 883.2229) I for Polisher 2: - NPV = $(-10,000 + 8,883-2229) - $1-1116.7771) Since NPU is negative, decrease rate to 12% year Cashflow 112% PUAF 1 15% PVA I PU 0 - 10,000 1-10,000 14010/ 1,770 15.65022 1 - 1 10,000.8894 NPU. $10,000.8894-10,000) - $0.8894 Decrease in Naka (17674 Increase in NPV = $90.8894 (-1116.7771)] - $ 1117.6665 Increase in NPU Decrease in discounting rate 1117.6665 3% - 11177771 107.777) 1117.6665 a 3.00030 So, IBR = (13 - 3.0003)% 12%

Year Cash you - 15,000 - 15,009.0426 for Polisher 3: NPV $(-15,000 +12967.1966) -$2967.1966 Since NPU is positive, increase rate to 20% year I Cash flow 120% PUAR 15% PUF PU I to 10 | 3,580 4,192471 NPV = $(15,009.0426 - 15,000) - $ 9.0426 Decrease inv=$(2967, 1966-9,0426) -$2958.154 . Decrease in NPU Increase in discounting rate 2958.154 2967, 1966 5 x 2967-1966 2958.154 5. 01528% So, IRR (18+ 5.01528% - 20.02% Therefore, based on IRR, Polisher 3 should be recommended. )