Question

Two mutually exclusive cost alternatives, Machine A and Machine B, are being evaluated.

Given the following time events and incremental cash flow, if the MARR is 12% per year, which alternative (Machine A or Machine B) should be selected on the basis of the incremental rate of return analysis? Assume Machine B requires the extra $10,000 initial investment. (You can use Excel).

                                                                                                                     

Year	Incremental Cash Flow ($) (Machine B - Machine A)
0	-10,000
1 - 4	1,300
5 - 7	3,200
8	4,500

                                                                                                                        

Question options:

	The "Incremental ROR" is more than MARR so select, Machine A
	The "Incremental ROR" is more than MARR, so select Machine B
	Select neither A nor B and go with DN
	The "Incremental ROR" is less than MARR, so select Machine A

Answer 1

Answer =
CALCULATION OF THE INCREAMENTAL PRESENT VALUE (Machine B - Machien A ) With MARR@ 12%
Year	Cash Flow	PVF @ 12%	Present Value
0	$   -10,000.00	1.0000	$       -10,000.00
1	$       1,300.00	0.8929	$           1,160.71
2	$       1,300.00	0.7972	$           1,036.35
3	$       1,300.00	0.7118	$               925.31
4	$       1,300.00	0.6355	$               826.17
5	$       3,200.00	0.5674	$           1,815.77
6	$       3,200.00	0.5066	$           1,621.22
7	$       3,200.00	0.4523	$           1,447.52
8	$       4,500.00	0.4039	$           1,817.47
		Total Present Value	$               650.53
Answer = Option 2 = "Increamental ROR" is more than MARR , So select Machiene B