Question

Data for two machines P and Q are as shown below. At what MARR will both machines be equally attractive for installation?

	Machine P	Machine Q
Initial cost	$160,000	$315,000
Life in years	4	6
Inflation per year (for all costs)	3.00%
Benefit increase per year	6.00%
MARR per year compounded yearly	14.00%
Project life in years	12
First year estimated costs	$43,200	$72,450
First year estimated benefits	$83,200	$129,150
Salvage value of machine (% of initial cost)	13.50%	10.00%

Group of answer choices

11.44%

12.17%

13.19%

17.98%

Answer 1

With the given information we need to analyse the two machines cashflows and check the net present value at the options of MARR given in question.

Firstly we are analysing the NPV at MARR of 11.44%, this will give us below value-

We can see that at MARR of 11.44% only we are getting marginally negative NPV's in both the machines, hence if we check this at bigger MARR the NPV's will further decrease, so the optimum MARR should be less than 11.44% only to get attractive valuation.