Question

Green Lawn Care is analyzing the replacement of an aging compactor motor. The key parameters of the three motors under scrutiny (Small, Medium and Big) are provided below.
Parameters	Small	Medium	Big
1. Initial Cost ($)	300,000	425,000	510,000
2. Revenues ($)	200,000 annually	200,000 at EOY1 increasing by 1% annually thereafter	290,000 at EOY1 decreasing by 1% annually thereafter
3. Operating Costs ($)	100,000 at EOY1 decreasing by $2,000 annually thereafter.	110,000 at EOY1 increasing by $500 annually thereafter.	165,000 at EOY1 increasing by $2,500 annually thereafter
4. End-of-life salvage value ($)	10,000	-5,000	30,000
5. Useful life (years)	5	10	10
EOY = End-of-year Industry Standard = 4 years MARR = 10%

1) Small’s Internal Rate of Return (IRR) (second decimal; no rounding) is

a) 20.79%; b) 21.89%; c) 22.67%; d) 23.89%.

2) Big’s Internal Rate of Return (IRR) (second decimal; no rounding) is

a) 10.84%; b) 12.67%; c) 14.61%; d) 16.86%.

3) The incremental Internal Rate of Return (ΔIRR) between Small and Big (second decimal; no rounding) is
a) 8.15%; b) 8.96%; c) 9.90%; d) 10.13%.

4) If the company’s current motor budget is $1,000,000, which motor (s) should it purchase assuming that motors are independent investments?

a) Small, Medium and Big; b) Medium only; c) Small and Medium; d) Medium and Big.

Answer 1

Particular	Small	medium	big
Revenue 1	200,000.00	200,000.00	290,000.00
2 yrs	200,000.00	202,000.00	287,100.00
3 yrs	200,000.00	204,020.00	284,229.00
4	200,000.00	206,060.20	281,386.71

	PV of cash inflow
Year	Small	Big
1	165,576.62	261,638.40
2	164,082.37	254,814.95
3	163,039.05	247,996.68
4	161,433.53	240,789.59
Total	654,131.57	1,005,239.61

Total cash inflow - PV of cash inflow - Initial Investment

Small = 654,131.57 - 300,000.00 = 354,131.57

Big = 1,005,239.61 - 510,000.00 = 495,239.61

Small motor revenue margin is more as compared to Big company, So small company & medium company is better option.

Option (C) is the best option for investment