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%.
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
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