Question

3) Calculate the rate of return on the incremental investment and determine which of the following mechanized irrigation systems, if any, should be selected by Schrute Farms, if the MARR is 6% per year. Will DN be included in the analysis? Why or why not?

	Centr Pivot	Lateral Move
Capital cost, $	-3,200,000	-4,800,000
Operating cost, $ per year	-250,000	-490,000
Revenue, $ per year	1,900,000	2,600,000
Life, years	10	10

Answer 1

ANSWER:

In order to find the rate of return on incremental investment , the incremental pw will be equated to zero.

pw (lateral move - centr pivot) = capital cost(lateral move - centr pivot) + operating cost(lateral move - centr pivot)(p/a,i,n) + revenue(lateral move - centr pivot)(p/a,i,n)

0 = (-4,800,000 - (-3,200,000)) + (-490,000 - (-250,000)) (p/a,i,10) + (2,600,000 - 1,900,000)(p/a,i,10)

0 = (-4,800,000 + 3,200,000) + (-490,000 + 250,000) (p/a,i,10) + 700,000(p/a,i,10)

0 = -1,600,000 - 240,000(p/a,i,10) + 700,000(p/a,i,10)

1,600,000 = 460,000(p/a,i,10)

solving via trial and error we get that the value of i is between 25% and 26% and solving further we get that i is 25.87%

since the value of i is more then 6% , therefore we will select lateral move.

do nothing should not be included in the analysis as the present worth of both the irrigation systems will be positive at a marr of 6%