Question

(35 points) Cameo's sales representative has offered an up front price reduction. The proposals are now as follows: Up front cost Annual cost saving Life (years) $ $ Apex (150,000) $ 65,000 $ 4. Brawn (250,000) $ 105,000 $ 4. Cameo (190,000) 81,000 4 Use incremental rate of return analysis to decide which alternative should be recommended. MARR is 12%.

Answer 1

For Apex, the present value of the cashflows at 12% would be =

-150000 + 65000*1.12-1 + 65000*1.12-2 + 65000*1.12-3 + 65000*1.12-4

= $47427.71

For Brawn, the present value of the cashflows at 12% would be =

= -250000 + 105000*1.12-1 + 105000*1.12-2 + 105000*1.12-3 + 105000*1.12-4

= $68921.68

For Cameo, the present value of the cashflows at 12% would be =

= -190000 + 81000*1.12-1 + 81000*1.12-2 + 81000*1.12-3 + 81000*1.12-4

= $56025.3

So, we can see that the net present value of Brawn is the highest and we should choose the proposal by Brawn.

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