Question

Wayward Airfreight, Inc. is considering a new automatic parcel sorter. Each choice has a 7-year life.

                                      Ship-R            Sort-Of            U-Sort-M

First cost                    $184,000         $235,000          $170,000

Salvage value                38,300             44,000             14,400

Annual benefit                75,300             89,000              68,000

Yearly O&M costs          19,000             19,000              12,000

Using a MARR of 15%and a Rate of Return Analysis, which alternative, if any, should be selected? Show all work; Do not use Excel; Draw the Cash Flow Diagram.

Answer 1

Use incremental rate of return to determine which alternative to choose. Use a MARR of 15%.

Ans: Order of increasing First Cost: Null, U-SORT-M, SHIP-R, and SORT-OF. MARR = 15%.

Increment (Null up to U-SORT-M, i):

NPW = -180,000 + {(68,000 - 12,000) (P/A, i, 7)} + {14,400 (P/F, i, 7)}

= -180,000 + (56,000 (P/A, 15%, 7)} + {14,400 (P/F, 15%, 7)} = $58,372.96

Since, NPW is greater than $0, the incremental ROR is greater than MARR.

Accept U-SORT-M.

Increment (U-SORT-M up to SHIP-R, i):

NPW = -(184,000 - 180,000) + [{(75,300 - 68,000) - (21,000 - 12,000)} (P/A, i, 7)] + {(38,300 -

14,400) (P/F, i, 7)}

= -4,000 - {1,700 (P/A, 15%, 7)} + {23,900 (P/F, 15%, 7)} = - $2,087.99

Since, NPW is less than $0, incremental RoR, is less than MARR.

Reject SHIP-R.

Increment (U-SORT-M up to SORT-OF, i):

NPW = -(235,000 - 180,000) + [{(89,000 - 68,000) - (21,000 - 12,000)} (P/A, i, 7)] + {(44,800 -

14,400) (P/F, i, 7)}

= -55,000 + {12,000 (P/A, 15%, 7)} + {30,400 (P/F, 15%, 7)} = $6,347.36

Since, NPW is greater than $0, incremental RoR is greater than MARR.

The correct choice is the SOR-OF. Choose SORT- OF.