Polytec Chemical, Inc. must decide between two additives to improve the dry-weather stability of its low-cost acrylic paint. Additive A will have an equipment and installation cost of $118,000 and an annual cost of $55,000. Additive B will have an installation cost of $175,000 and an annual cost of $34,000. If the company uses a five-year recovery period for paint products and an MARR of 24% per year, which process is favored on the basis of an incremental rate of return analysis? Also, determine the value of Δi
Find value of Δi
MARR = 24%
We will use IRR function on the incremental cash flow
| Year | Alternative A | Alternative B | B-A |
| 0 | -118000 | -175000 | -57000 |
| 1 | -55000 | -34000 | 21000 |
| 2 | -55000 | -34000 | 21000 |
| 3 | -55000 | -34000 | 21000 |
| 4 | -55000 | -34000 | 21000 |
| 5 | -55000 | -34000 | 21000 |
| Incremental IRR | 24.55% | ||
As incremental IRR > MARR, so alternative B should be selected
Showing formula in excel
| Year | Alternative A | Alternative B | B-A |
| 0 | -118000 | -175000 | =D91-C91 |
| 1 | -55000 | -34000 | =D92-C92 |
| 2 | -55000 | -34000 | =D93-C93 |
| 3 | -55000 | -34000 | =D94-C94 |
| 4 | -55000 | -34000 | =D95-C95 |
| 5 | -55000 | -34000 | =D96-C96 |
| Incremental IRR | =IRR(E91:E96) | ||
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