Question

1. Given the costs and benefits of two water pumps, what is the rate of return on the difference of these alternatives? Year -$3000 +800 +800 +800 +800 +800 -$3800 +1200 +1200 +1200 +1200 +1200 What is your choice of these 2 alternatives and why? 2. The manager of a local restaurant is trying to decide whether to buy a charcoal broiling unit or an electric grill for cooking hamburgers. A market study shows customers prefer charcoal broiling but the unit is more expensive. The manager's Minimum Attractive Rate of Return (MARR) is 20%. The manager estimates the cost and net benefits from the two alternatives as follows: End of Year Broiler Grill -$1450 +710 Find the rate of return of broiler and grill, need exact values. And use incremental rate of return analysis to determinate which alternative the manager should choose. 3. General Motors makes a "P-Car" automobile model. The standard P-Card is sold as a Chevy while a modified more "luxurious" P-Car is sold as a Buick. Although the two cars are essentially the same, the Buick costs $15,000 while the Chevy costs $13,000. A friend of yours claims that the Buick is a better buy than the Chevy since the Buick has a higher resale value. The Buick may be sold after 4 years for $7500 while the Chevy can be sold for $5000. (a) Calculate the incremental rate of return. Express your final answer as XXXXX% (b) For what range of values of the Minimum Attractive Rate of Return (MARR), if any is the Buick preferred? (c) For what range of values of MARR, if any, is the Chevy preferred? (Ignore the "benefit""cost' of owning/operating a more luxurious car.) Investment Cost Annual Maintenance Cost Salvage Useful Life $20,000 2,000 5,000 20 years $10,000 4,000 1,000 20 years (a) Determine the incremental rate of return between the two projects, to the nearest 1/100 percent. (b) which project should be chosen if MARR-18%? (No additional calculations needed.) 5. Consider four mutually exclusive alternatives that have 10-year useful lives and no salvage value. If the Minimum Rate of Return (MARR) is 6%, which alternative should be selected? A. $3000 Initial Cost Uniform Annual Benefit Also find ROR $2000 259 $5000 $4000 651 447 885

Answer 1

1.)
Let rate of return be X and Y in alternative A and B respectively
A
3000 = 800/x + 800/(x)^2 + 800/(x)^3 + 800/(x)^4 + 800/(x)^5
Solving X we Get
X = 10.425%
A
3800 = 1200/y + 1200/(y)^2 + 1200/(y)^3 + 1200/(y)^4 + 1200/(y)^5
Solving Y we Get
Y = 17.488%
Alternative B Should be Chosen
2.)
	YEAR	Broiler	Grill	difference
	0	-2200	-1450	-750
	1	990	710	280
	2	990	710	280
	3	990	710	280
	4	990	710	280
	5	990	710	280
Internal Rate of return on broiler(based on above) = 34.943%
Internal Rate of return on Grill(based on above) = 39.794%
Incremental Rate of return=
750 = 280/(x)+280/(x)^2+280/(x)^3+280/(x)^4+280/(x)^5
Calculating X, we get
X = 25.195%
UNDER INCREMENTAL ANALLYSIS, WE SHOULD CHOSE BOILER					ANS
3.)
A.)
	YEAR	BUICK	CHEVY	difference
	0	-15000	-13000	-2000
	1	0	0	0
	2	0	0	0
	3	0	0	0
	4	7500	5000	2500
	IRR	-15.91%	-21.25%	5.74%
THEREFORE INCREMENTAL RATE OF RETURN IS 5.74%					ANS
B.) RANGE OF VALUE = 0 TO 15.91%
C.) RANGE OF VALUE = 15.91% TO 21.25%

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