Question

Use the rate of return values of the equipment alternatives given in the following table to assist your manager to decide, if any, which one to purchase given that the MARR is 10%.

Answer 1

It shall be noted that cash outflow and cash inflow of all these 4 alternatives and hence, their respective net cash inflows are as follows:

Cash Outflow is the Costs incurred in each alternative - First Cost and Annual Cost

Cash Inflow is the annual revenue that each alternative generates

Net Cash Inflow = Cash Inflow - Cash Outflow

Year	A1	A2	A3	A4
	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow
0	80000		-80000	55000		-55000	150000		-150000	25000		-25000
1	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
2	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
3	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
4	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000

The rate of return for each alternative is the estimated internal rate of return that can be estimated using IRR() excel function over the net cash inflow of each alternative.

The result is:

Year	A1	A2	A3	A4
	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow	Cash Outflow	Cash Inflow	Net Cash Inflow
0	80000		-80000	55000		-55000	150000		-150000	25000		-25000
1	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
2	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
3	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
4	30000	62000	32000	28000	46000	18000	18000	52000	34000	20000	30000	10000
	Internal Rate of Return	21.8622696%	Internal Rate of Return	11.72%	Internal Rate of Return	-3.81%	Internal Rate of Return	21.8622696%

Since MARR is 10%, Alternative A3 is ruled out as its IRR is -3.81%

Since, the IRR is the highest for both Alternative A1 and A4 at 21.8622696% so Alternative A1 or A4 could be suggested for purchase on the basis of rate of return values.