Question

13. Apple is developing a future iPhone version, the iPhone H, which will produce holograms for Facetime messaging and other social media. Two vendors have provided proposals for the technology platform for the iPhone H. The selection of a vendor will be made based on Incremental Rate of Return Analysis. Apple uses a MARR of 17% per year, which vendor proposal should be selected? You only need to interpolate ifnecessar to make a decision. You can also use Excel or Equation to determine the Incremental ROR [13 pts.] Vendor 1 Vendor 25,000,000 30,000,000 12,000,000 14,000,000 First cost, S Annual revenue, S/year Annual maintenance cost, $/year Life, years Internal Rate of Return (i* 4,000,000 4,500,000 17.57% 18.03%

Answer 1

We observe that Internal rate of return, i*, is higher than MARR (17%) in both cases.

Initial Cost is lower in case of vendor 1, we take it as base case.

We carry out incremental internal rate of return analysis to judge if it is advisable to spend extra amount on vendor 2.

Initial Cost in case of vendor 1=-$25,000,000

Net revenue per year in case of vendor 1=(12,000,000-4,000,000)=$8,000,000

Initial Cost in case of vendor 2=-$30,000,000

Net revenue per year in case of vendor 1=(14,000,000-4,500,000)=$9,500,000

Incremental initial cost in case of vendor 2=-30000000-25000000=-$5000000

Incremental net revenue in case of vendor 2=9500000-8000000=$1500000

I shall use MS Excel to determine incremental IRR.

	Cash Flows
Year	Vendor 1, CF1	Vendor 2, CF2	Incremental CF=CF2-CF1
0	-25000000	-30000000	-5000000
1	8000000	9500000	1500000
2	8000000	9500000	1500000
3	8000000	9500000	1500000
4	8000000	9500000	1500000
5	8000000	9500000	1500000
IRR			15.24%

I am enclosing screenshot of MS Exec to get the idea how formula is being used.

Bookl - Microsoft Excel (Product Activation Fail Insert Page Layout Formulas Data File Review View Acrobat insert Σ.ArA Percentage Delete % , Ito:": | Conditional Format Cell Formatting as Table Styles Paste Sort & Find & Format Filter Select 逗逗 ▼ Clipboard Font Alignment Number Styles Cells Editing SUM Cash Flows Incremental endor 1, CF1|Vendor 2, CF21CFaCF2-CF1 x13 2 Year 30000000 4 9500000 9500000 9500000 9500000 1500000 9500000 9 IRR Firr(D3:D8) 10 12 13 14 15 16 17 19 21 23 24 HI Sheet1 Sheet2 Sheet3 Enter 07:37 #x.11 21-05-2019

We find that incremental IRR is lower than MARR (i.e. 17%). So, it is not worth to invest extra budget on Vendor 2 proposal.

So,

Proposal of Vendor 1 should be selected.