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 $114,000 and an annual cost of $55,000. Additive B will have an installation cost of $175,000 and an annual cost of $32,000. If the company uses a five-year recovery period for paint products and an MARR of 18% per year, which process is favored on the basis of an incremental rate of return analysis? Also, determine the value of Δi*.

The value of Δi* is  %.

On the basis of an incremental rate of return analysis, process  (Click to select)  B  A  is favored.

Answer 1

The given data is executed in an excel to get the IRR:

So, The Incremental IRR of B over A is 25.68% which is greater than the given MARR of 18%. So,  Additive B should be favored.

The excel formula and calculation used are shown below:

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