Question

Final Finishing is considering three mutually exclusive alternatives for a new polisher. Each alternative has an expected life of 10 years and no salvage value. Polisher 1 requires an initial investment of $20,000 and provides annual benefits of $4,465. Polisher 2 requires an initial investment of $10,000 and provides annual benefits of $1,770. Polisher 3 requires an initial investment of $15,000 and provides annual benefits of $3,580. MARR is 15%/year. Show the comparisons and internal rates of return used to make your decision: Comparison 1: Entry field with correct answer IRR 1: Entry field with incorrect answer% Comparison 2: Entry field with incorrect answer IRR 2: Entry field with incorrect answer% Comparison 3: Entry field with correct answer IRR 3: Entry field with incorrect answer% Carry all interim calculations to 5 decimal places and then round your final answer to 1 decimal place. The tolerance is ±0.2. Based on an internal rate of return analysis, which polisher should be recommended? Entry field with a correct answer

Answer 1

Polisher 1

initial investment-20000

annual benefits4465

years10

r?

The IRR will be18.09

formula will be of PVIFA

20000=4465(PVIFA 18.09%,10)

=44651-1/1.1809^10

0.1809

44651-0.190

0.181

44650.810

0.181

44654.477275

20000=19991.03

Polisher 2

initial investment-10000

annual benefits1770

years10

r?

The IRR will be12

formula will be of PVIFA

10000=10000(PVIFA 12%,10)

=17701-1/1.12^10

0.12

17701-0.322

0.120

17700.678

0.12

17705.650223

10000=10000.89

Polisher 3

initial investment-15000

annual benefits3580

years10

r?

The IRR will be20.02

formula will be of PVIFA

15000=3580(PVIFA 20.02%,10)

=35801-1/1.2002^10

0.2002

35801-0.161

0.200

35800.839

0.2002

35804.189627

15000=14998.87

out of all the above 3

we can select polsher 1 andpolisher 3 as its IRR is above the MARR

but as they are mutuallyexclusive we have to select

polisher 3 as it provides thehighest irr.