Question

A construction contractor needs to choose between two suppliers of dump trucks. Supplier 1 has an initial cost of $125,000 and annual operating cost of $25, 000 per year.   Supplier 2 has initial cost $160,000 and has annual operating cost of 20,000 per year. The truck fleet has the same 10-year life forecast   Based on incremental rate of return (IROR) and a MARR of 8%, and which supplier of trucks should the contractor choose? SHOW WORK AND DONT USE EXCEL

Answer 1

Incremental initial cost (2 - 1) = 160000 - 125000 = 35000

Incremental annual cost (2 - 1) = 20000 - 25000 = -5000 (Annual savings)

Let incremental IRR be i%, then

5000*(P/A,i%,10) = 35000

(P/A,i%,10) = 35000 / 5000 = 7

using trail and error method

When i = 7%, value of (P/A,i%,10) = 7.023582

When i = 8%, value of (P/A,i%,10) = 6.710081

using interpolation

i = 7% + (7.023582-7)/(7.023582-6.710081)*(8%-7%)

i = 7% + 0.0752% = 7.07%

As incremental IRR < MARR, supplier 1 should be selected