Question

2. (20 Points) If the useful life is ten years and MARR-8% , choose the best alternative based on Rate of Return analysis with incremental cash flow. Hint: Set NPW-01 A C Initial Cost $40,000 $6,800 $50,000 $55,000 Annual Benefit $8,400 $9,100

Answer 1

ANSWER:

N = 10 YEARS

In order to calculate the incremental rate of return we will equate the incremental pw to zero.

we will subtract b from c as c has the highest initial cost followed by b.

pw(c - b) = initial cost (c - b) + annual benefit(c - b)(p/a,i,n)

0 = (-55000 - (-50000) ) + (9100 - 8400)(p/a,i,10)

0 = (-55000 + 50000) + 700(p/a,i,10)

0 = -5,000 + 700(p/a,i,10)

5,000 = 700(p/a,i,10)

solving i via trial and error we get that i is between 6% and 7% and solving further we get that i is 6.64%

since i is less then marr we select b and compare it with a.

pw(b - a) = initial cost (b - a) + annual benefit(b - a)(p/a,i,n)

0 = (-50000 - (-40000) ) + (8400 - 6800)(p/a,i,10)

0 = (-50000 + 40000) + 1600(p/a,i,10)

0 = -10,000 + 1600(p/a,i,10)

10,000 = 1600(p/a,i,10)

solving i via trial and error we get that i is between 9% and 10% and solving further we get that i is 9.61%

since i is more then marr we will select b.

so b is the chosen option.