Question

chort Answers: (3 questions, 18 points each) Given a value of MARR at 9%, use Rate of Return analysis to determine the best alternative. Doing nothing is an ption. Each has an expected life of ten years. 220000 10000 100 7000

Answer 1

ANSWER:

Option 1:

In order to find the rate of return we will equate the present worth to zero.

pw = initial cost + annual benefit(p/a,i,n) + salvage value(p/f,i,n)

0 = -220,000 + 37,000(p/a,i,10) + 17,000(p/f,i,10)

220,000 = 37,000(p/a,i,10) + 17,000(p/f,i,10)

solving via trial and error we get that i is between 11% and 12% and solving further we get that i is 11.41%

option 2:

In order to find the rate of return we will equate the present worth to zero.

pw = initial cost + annual benefit(p/a,i,n) + salvage value(p/f,i,n)

0 = -100,000 + 15,000(p/a,i,10) + 7,000(p/f,i,10)

100,000 = 15,000(p/a,i,10) + 7,000(p/f,i,10)

solving via trial and error we get that i is between 8% and 9% and solving further we get that i is 8.83%

option 3:

in order to find the rate of return we will equate the present worth to zero.

pw = initial cost + annual benefit(p/a,i,n) + salvage value(p/f,i,n)

0 = -315,000 + 52,000(p/a,i,10) + 24,000(p/f,i,10)

315,000 = 52,000(p/a,i,10) + 24,000(p/f,i,10)

solving via trial and error we get that i is between 10% and 11% and solving further we get that i is 10.98%

option 4:

in order to find the rate of return we will equate the present worth to zero.

pw = initial cost + annual benefit(p/a,i,n) + salvage value(p/f,i,n)

0 = -200,000 + 29,000(p/a,i,10) + 16,000(p/f,i,10)

200,000 = 29,000(p/a,i,10) + 16,000(p/f,i,10)

solving via trial and error we get that i is between 8% and 9% and solving further we get that i is 8.21%

If the alternatives are mutually exclusive then only option 1 will be chosen as it has the highest rate of return and the rate of return is more then the marr.

if the alternatives are independent of each other then option 1 and option 3 will be chosen as these alternatives rate of return is more then the marr.