Question

A business owner must purchase a new piece of equipment for his manufacturing process. He has narrowed it down between two options that both have a useful life of 9 years. Option A has an initial cost of $18,000, will provide the company with $3000 a year in profit, and has a salvage value of $1000. Option B has no salvage value and is more expensive with an initial cost $26,000 but it will provide the company with $4200 a year in profit. The business owner has a savings account that earns 7% a year in interest (i.e. MARR=7%). Determine the Incremental Rate of Return. Round to the nearest whole number.

&

Which option should he choose?

Answer 1

The following information is given to us

Initial investment of A is less than B therefore select A as base alternative and then subtract the cash flow of A from B. Refer the Last column of above tabel there i have calcualted the incremental cash flow. Express the CF in the NPW equation as below

We can determine the IRR using trial and error method assuem rate = 5%

Now assume rate = 4%

Now apply linear interpoaltion

The incremental IRR is less than MARR therefore Reject the costlier alternative and select the cheaper option.

Select A.

I have solved it using Excel function too got the same value.

Please contact if having any query will be obliged to you for your generous support. Your gelp mean a lot to me, please help. Thank you