Question

Q8-34A firm is considering moving its manufacturing plant from Chicago to a new location. The industrial engineering department was asked to identify the various alternatives together with the costs to relocate the plant and the benefits. The engineers examined six likely sites, together with the do-nothing alternative of keeping the plant at its present location. Their findings are summarized as follows:

The annual benefits are expected to be constant over the 8-year analysis period.

A)Construct a choice table for interest rates from 0% to 100%.

B) If the firm uses 10% annual interest in its economic analysis, where should the manufacturing plant be located?

	first cost	uniform annual benefit
Denver	300	52
Dallas	550	137
San Antonio	450	117
Los Angeles	750	167
Cleveland	150	18
Atlanta	200	49
Chicago	0	0

Alternative	i	N	PMT	PV	FV	Solve for	Answer
Chicago						Rate
Cleveland						Rate
Atlanta						Rate
Denver						Rate

Calculate EUAW
Rate	Chicago	Cleveland	Atlanta	Denver	San Antonio	Dallas	Los Angeles	Select
0%							0
5%							0
10%							0

Answer 1

A). Choice table (using EUAW):

EUAW = annual benefit - first cost*(A/P, Rate, 8)

The option giving maximum EUAW for a given rate is selected.

B). IRR calculation:

Using IRR, Cleveland is rejected as it has a negative IRR.

Now, for incremental IRR, the alternatives are arranged in the ascending order of first cost and then compared pair-wise, using incremental IRR. If incremental IRR > MARR (10%) then the alternative with the higher first cost is accepted otherwise it is rejected. In this way, all alternatives are compared and the one remaining in the end, is the best alternative among the given ones.

As can be seen, at the end, Dallas comes out as the best alternative on the basis of incremental IRR.