Question

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

Answer 1

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)