Question

Poly-Chem Plastics is considering two types of injection molding machines: hydraulic and electric. The hydraulic press (HP) will have a first cost of $545,000, annual costs of $200,000, and a salvage value of $70,000 after 5 years. Electric machine technology (EMT) will have a first cost of $800,000, annual costs of $98,000, and a salvage value of $130,000 after 5 years.

Use an AW-based equation to determine the ROR on the extra investment required for the EMT alternative.

The ROR on the extra investment for the EMT alternative is _____%.

Answer 1

Incremental initial cost (EMT - HP) = 800000 - 545000 = 255000

Incremental annual cost (EMT - HP) = 98000 - 200000 = -102000 (Annual savings)

Incremental salvage value (EMT - HP) = 130000 - 70000 = 60000

Let i% be the incremental ROR, then

EUAC = EUAB

255000*(A/P,i%,5) = 102000 + 60000*(A/F,i%,5)

255000*(A/P,i%,5) - 102000 - 60000*(A/F,i%,5) = 0

Dividing by 1000

102 + 60*(A/F,i%,5) - 255*(A/P,i%,5) = 0

using trail and error method

When i =31%, value of 102 + 60*(A/F,i%,5) - 255*(A/P,i%,5) = 102 + 60*0.108469 - 255*0.418469 = 1.798467

When i =32%, value of 102 + 60*(A/F,i%,5) - 255*(A/P,i%,5) = 102 + 60*0.106402 - 255*0.426402 = -0.348376

using interpolation

i = 31% + (1.798467-0)/(1.798467-(-0.348376))*(32%-31%)

i = 31% + 0.8377% = 31.8377% ~ 31.84%