In: Economics
A firm is evaluating new widget machines offered by four companies. The selections are mutually exclusive and only one will be bought. Use incremental rate of return analysis to decide which company’s widget machine should be purchased based on a MARR of 10%.
Company A | Company B | Company C | Company D | |
Initial Costs | $100,000 | $150,000 | $180,000 | $190,000 |
Annual Benefit | $31,000 | $40,000 | $33,000 | $25,000 |
Salvage value | $9000 | $30,000 | $27,000 | $5,000 |
Lifetime | 4 years | 4 years | 8 years | 12 years |
IRR | 11.9% | 9.2% | 11.2% | 8% |
Solution:
Answer- By using incremental rate of return analysis we should purchase machine of Company A based on a MARR of 10%.
Explanation- We know,
if , the project is economically viable.
In this question for two company . And two company are Company A & Company C. In this case we should choose the option whose IRR is greater. Here, IRR of Company A > IRR of Company C (11.9% > 11.2%). Therefore, we should purchase machine of Company A based on a MARR of 10%.