Question

You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an...

You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an eight year life and you plan to keep whichever machine you pick for the full 8 years. The firm's MARR is 10%. The cash flows for each machine are summarized in the following table: A B Initial Cost $4000 $3000 Annual Benefit $800 $600 Annual Cost $100 $50 Salvage Value $1500 $1000 Each investment has an IRR greater than the 10% MARR. Using Incremental Replacement Analysis, which investment should be chosen and why (show calculations in answer or in written submission)?

Homework Answers

Answer #1

t = 8 yrs

MARR = 10%

Base alternative will be B, as it has lower cost

Incremental initial cost (A-B) = 4000 - 3000 = 1000

Incremental annual cost (A-B) = 100 - 50 = 50

Incremental annual benefit (A-B) = 800 - 600 = 200

Incremental salvage value (A-B) = 1500 - 1000 = 500

Let incremental salvage value be i%, then

(200-50)*(P/A,i%,8) + 500*(P/F,i%,8) = 1000

150*(P/A,i%,8) + 500*(P/F,i%,8) = 1000

Dividing by 50

3*(P/A,i%,8) + 10*(P/F,i%,8) = 20

using trail and error method

When i = 10%, value of 3*(P/A,i%,8) + 10*(P/F,i%,8) = 3*5.334926 + 10*0.466507 = 20.669852

When i = 11%, value of 3*(P/A,i%,8) + 10*(P/F,i%,8) = 3*5.146123 + 10*0.433926 = 19.777633

using interpolation

i = 10% + (20.669852-20)/(20.669852-19.777633)*(11%-10%)

i = 10% + 0.75% = 10.75% (Approx)

As incremental IRR > MARR, option A should be selected

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an...
You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an eight year life and you plan to keep whichever machine you pick for the full 8 years. The firm's MARR is 10%. The cash flows for each machine are summarized in the following table: A B Initial Cost $4000 $3000 Annual Benefit $800 $600 Annual Cost $100 $50 Salvage Value $1500 $1000 Each investment has an IRR greater than the 10% MARR. Using Incremental...
You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an...
You are evaluating 2 machines the investment of 2 mutually exclusive machines. Each machine has an eight year life and you plan to keep whichever machine you pick for the full 8 years. The firm's MARR is 10%. The cash flows for each machine are summarized in the following table: A B Initial Cost $4000 $3000 Annual Benefit $800 $600 Annual Cost $100 $50 Salvage Value $1500 $1000 Each investment has an IRR greater than the 10% MARR. Using Incremental...
Two mutually exclusive diesel generators are considered for purchase by a power generation company. Information relevant...
Two mutually exclusive diesel generators are considered for purchase by a power generation company. Information relevant to compare the alternatives is summarized below: Generator A Generator B Capital investment $100,000 $80,000 Market value at the end of service life $35,000 $10,000 Annual fuel and maintenance expenses $3,000 $5,000 Service life 10 years 10 years Use the IRR method to determine the better machine to be purchased. The MARR is 10% per year.
Compare two competing, mutually exclusive new machines that have only cost data given and tell which...
Compare two competing, mutually exclusive new machines that have only cost data given and tell which of the following statements is true regarding the present worth of the incremental investment at your investment interest rate. a.) If it is greater than zero, we chose the alternative with the largest initial investment expense. b.) The internal rate of return will always be equal to the investment rate of return. c.) Neither machine is chosen if there is only cost data and...
IRR: Mutually exclusive projects Ocean Pacific Restaurant is evaluating two mutually exclusive projects for expanding the...
IRR: Mutually exclusive projects Ocean Pacific Restaurant is evaluating two mutually exclusive projects for expanding the restaurant's seating capacity. The relevant cash flows for the projects are shown in the following table. The firm's cost of capital is 4%. Project X Project Y Initial Investment (CF) 980,000 363,000 Year               Cash inflows (CF) 1 150,000 110,000 2 170,000 98,000 3 220,000 93,000 4 270,000 82,000 5 340,000 67,000 a. calculate the IRR to the nearest whole percent for each of...
A firm must choose between two mutually exclusive projects, A & B. Project A has an...
A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of $11000. Its projected net cash flows are $900, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. Project B has an initial cost of $15000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. If the firm’s cost of capital is 6.00%: Project...
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that...
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million per y The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million...
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that...
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 million and realizes after-tax inflows of $3.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are...
A firm must choose between two mutually exclusive projects, A & B. Project A has an...
A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of $11000. Its projected net cash flows are $900, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. Project B has an initial cost of $15000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. If the firm’s cost of capital is 6.00%: A....
A firm must choose between two mutually exclusive projects, A & B. Project A has an...
A firm must choose between two mutually exclusive projects, A & B. Project A has an initial cost of $10000. Its projected net cash flows are $800, $2000, $3000, $4000, and $5000 at the end of years 1 through 5, respectively. Project B has an initial cost of $14000, and its projected net cash flows are $7000, $5000, $3000, $2000, and $1000 at the end of years 1 through 5, respectively. The firm’s cost of capital is 6.00%. Choose the...