Question

3. (20 Points) Choose the best alternative based on challenger-defender principle for incremental cash flow, when the MARR-15%. Assume 7 years of useful life for each alternative. Hint: Set EUAW-0; 10% < i< 20 % C A $180,000 $14,400 $68,000 $12,000 S235,000 $44,000 $89,000 $21,000 Initial Cost $184,000 Salvage Value $38,300 Annual Benefit $75,300 Yearly 0&M Cost $21,000

Answer 1

In the incremental analysis
a) First arrange all the alternatives in ascending order with respect to initial investment.
b) After that calculate the incremental cash flow and net present worth.
c) Next is to calculate IRR which could be calculated by trial and error method or using spreadsheet program.
d) If that is more than MARR then the alternative is selected and if it is lower then rejected.

	C	A	B
Initial Cost	-180000	-184000	-235000
Salvage Value	14400	38300	44000
Annual Benefit	68000	75300	89000
Annual O&M Cost	-12000	-21000	-21000
Life in Years	7	7	7
Incremental Cash Flow	C vs A	C vs B
Initial Cost	-4000	-55000
Salvage Value	23900	29600
Annual Benefit for 7 Years	51100	147000
Annual O&M Cost for 7 Years	-63000	-63000
IRR	-9.33%	70.96%

In the above analysis, first alternative C and alternative A is selected for comparison.
It has an IRR of -9.33% which is less than MARR of 15% and so it should be rejected.

Now, alternative C and alternative B is chosen for comparison.
Its IRR turned out to be 70.96% which is more than MARR of 15% and so that alternative B should be selected.