Question

Scenario 2: A firm is considering which of two devices to install to reduce costs. Both devices have a useful live of 5 years and zero salvage value. The firm has a MARR of 12% per year and a reinvestment rate of 10% per year.

Device A costs $10,000 dollars and is expected to save $3,000 annually.

Device B costs $13,500 and will provide cost savings of $3,000 the first year, $3,500 the second year, $4,000 the third year, $4,500 the fourth year, and $5,000 the fifth year.

2A. Which device is the challenger? 2B. Use the defender-challenger approach to calculate the incremental external rate of return for Scenario 2. If the incremental external rate of return is 11.75%, which device would you recommend?

Answer 1

Ans:- Two Divice Install and Reduce cost .

Cost per divice (A) $10,000

Ans (B) $13,500

Calculate the Cost of saving per Divice

Particular	Divice (A) Amount in $	Divice (B) Amount in $
Total cost of Divice	10000	13500
Cost saving 1year	3000	3000
2ed year	3000	3500
3re year	3000	4000
4rth year	3000	4500
5th year	3000	5000
Total cost saving in divice life	15000	20000
Total Investment in Divice@10%	1500	2000

Incremental external rate of return @11.75%

In chace of Dvice new divice brought cost (A)$10000+11.75%=$11175-1500=$9675

(B)$13500+11.75%=$15086.25-2000=$13086.25

I would suggest to Divice (B) is very useful in firm (1) Low cost and cost of saving per year Increasing.

(2) Investment in very good value for the firm ,that is other divice in purchase cost reduce ,

(3) Installation cost reduce ,in divice install permanently for 5 year no anyone problem.

(4) High cost divice install no think about the divice problem.

(5) I would recommend the divice no (B).