Question

Mowbot’s management is evaluating new proposals for production machines from three companies:

Alternative Apex Brawn Cameo

Up front cost $150,000 $250,000 $200,000

Cost savings / year $65,000 $105,000 $81,000

Economic life, years 4 4 4

Use incremental present worth analysis to decide which alternative should be recommended. MARR is 12%.

Answer 1

Arranging alternatives in increasing order of initial cost

Apex < Cameo < Brawn

Incremental analysis (Cameo - Apex)

incremental cost = 200000 - 150000 = 50000

incremental cost savings = 81000 - 65000 = 16000

incremental PW = -50000 + 16000*(P/A,12%,4)

= -50000+16000*3.037349

= -1402.42

As incremental PW is negative, Apex option is selected

Incremental analysis (Brawn - Apex)

incremental cost = 250000 - 150000 = 100000

incremental cost savings = 105000 - 65000 = 40000

incremental PW = -100000 + 40000*(P/A,12%,4)

= -100000+40000*3.037349

= 21493.96

As incremental PW is positive, Brawn option is selected

Fianlly Brawn option should be selected