Question

An insulated shipping container supplier is considering expanding its product line. Three
materials with different insulation properties are under consideration. The following
information is prepared for the economic evaluation of the best material. If the
company's MARR is 4% per year and the study period is 5 years, use an AW-based
incremental rate of return equation to determine which alternative is preferred. Assume
the salvage value is negligible.

Material	Q	R	S
First Cost $	46,000	58,000	61,000
Net annual revenue	$10,000 in year 1, increasing by $100 per year thereafter	$11,900, increasing by $450 per year thereafter	$13,450
IRR %	5.93	5.15	5.14
Incremental IRR %
Q	-
R	2.50%	-
S	2.79%	5.09%	-

This is all the information provided. Please give a detailed step by step explanation to the solution. Thank you!

Answer 1

AW (R-Q)=0= -12,000(A/P, i%, 5)+1900+350 (A/G, i%, 5)
IRR (R-Q)=2.50%<4%; therefore, discard material R.
AW(S-Q)=0= -15,000(A/P, i%, 5)+3450-100 (A/G, i%, 5)
IRR (S-Q)=2.79%<4%; therefore, discard material S.
material Q is selected
Rank Q, R and S
AW (R-Q)=0=[-58,000-(-46,000)](A/P, i%, 5)+1900+(450-100) (A/G, i%,5)
= -12,000(A/P, i%, 5)+1900+350 (A/G, i%, 5)
IRR (R-Q)=2.50%<4%; therefore, material R to be discarded.
AW(S-Q)=0=[-61,000-(-46,000)](A/P, i%, 5)+3450-100 (A/G, i%, 5)=0
= -15,000(A/P, i%, 5)+3450-100 (A/G, i%, 5)IRR (S-Q)=2.79%<4%;
therefore, material S to be discarded.

Thus, Q will be selected