Question

A process control manager is considering two ro­bots to improve materials-handling capacity in the production of rigid shaft couplings that make dissimilar drive components. Robot X has a first cost of $86,000, an annual M&O cost of $31,000, and $45,000 salvage value, and it will improve revenues by $96,000 per year. Robot Y has a first cost of $146,000, an annual M&O cost of $28,000, and $47,000 salvage value, and it will increase revenues by $130,000 per year. The company’s MARR is 34% per year, and it uses a 3-year study period for economic evaluations. Calculate the incremental ROR, and identify the robot the manager should select.

The incremental ROR is _______ %

Answer 1

Incremental first cost = -146000 - ( - 86000) = -60000

Incremental annual cost = -28000 - ( - 31000) = 3000

Incremental increased annual revenue = 130000 - 96000 = 34000

Incremental salvage value = 47000 - 45000 = 2000

Incremental ROR will have present value of increment (Y - X) = 0

-60000 + (3000 + 34000)(P/A, i%, 3) + 2000(P/F, i%, 3) = 0

Using excel function, we get RATE(3,37000,-60000,2000) = 39.37%

Hence required ROR is 39.37%

Since incremental ROR > MARR, we select Y.