Question

dget machines The chosen machine A А 8-18 OZY, Inc. is evaluating new widget mac offered by three companies. The chosen will be used for 3 years. Company Company Company B First cost $15,000 $25,000 $20,000 Maintenance 1,600 400 900 and operating Annual benefit 8,000 13,000 9,000 Salvage value 3,000 6,000 4,500 NOTE: MARR used is 15%. Use 4 years instead of 3 years. (“The chosen machine will be used for 4 years.") Solve for the following for 1.ROR for the first increment in the incremental analysis. 2.ROR for the second increment in the incremental analysis.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

L2T A B C D E F G H I J MARR 15% We conduct Incremental ROR analysis in ascending order of initial investment and If Incremental ROR > MARR then choose Project with higher initial investment. Year Year А с Т -$15,000.00 $20,000.00 $6,400.00 $8,100.00 $6,400.00 $8,100.00 $6,400.00 $8,100.00 $9,400.00 $12,600.00 Incremental ROR С -А | $5,000.00 $1,700.00 $1,700.00 $1,700.00 $3,200.00 21.18% B -$20,000.00 -$25,000.00 $8,100.00 $12,600.00 $8,100.00 $12,600.00 $8,100.00 $12,600.00 $12,600.00 $18,600.00 Incremental ROR B-C $5,000.00 $4,500.00 $4,500.00 $4,500.00 $6,000.00 84.41% Incremental ROR > MARR, thus choose C here. Incremental ROR > MARR, thus choose B here. 14 16 Company B is winner in our incremental ROR analysis. 18 20

Cell reference -

А в с D E F G H I MARR 0.15 We conduct Incremental ROR analysis in ascending order of initial investment and if Incremental ROR > MARR then choose Project with higher initial investment. Year o A C C-A -15000 -20000 =D7-C7 =8000-1600 =9000-900 =D8-C8 =8000-1600 =9000-900 =D9-C9 =8000-1600 =9000-900 =D10-C10 =8000-1600+3000 =9000-900+4500 =D11-C11 Incremental ROR =IRR(E7:E11) Year C B B-C Jo -20000 -25000 =17-H7 1=9000-900 =13000-400 =18-H8 =9000-900 =13000-400 =19-H9 =9000-900 =13000-400 =110-H10 =9000-900+4500 =13000-400+6000 =111-H11 Incremental ROR =IRR(17:J11) Incremental ROR > MARR, thus choose C here. Incremental ROR > MARR, thus choose B here. Company B is winner in our incremental ROR analysis.

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