Three proposals are under review for equipment replacement at ACME. ACME uses an MARR of 12.0%...

Three proposals are under review for equipment replacement at ACME. ACME uses an MARR of 12.0% when evaluating the economic contribution of investments. Data on the cost of each is shown below. Answer questions that follow based on this data.

Proposal	Investment Amt	1	2	3	4	5
A	440,000	36,000	41,000	42,000	44,000	71,000
B	280,000	82,000	88,000	94,000	100,000	120,000
C	370,000	54,000	58,000	61,000	70,000	90,000

a. Using a rate of return method for analysis, what is the rate of return of the extra investment required to purchase the middle cost proposal in place of the lowest cost proposal?

b. Using a rate of return method for analysis, what is the rate of return of the extra investment required to purchase the highest cost proposal in place of the lowest cost proposal?

c. Using a rate of return method for analysis, what is the rate of return of the extra investment required to purchase the highest cost proposal in place of the middle cost proposal?

d. Which of the three proposals makes the best economic value for ACME provided ACME has the capital to invest?

Expert Solution

Please see the table below. The first column tells you which part (a), (b) or (c) is being answered in each line. The second last column highlighted in yellow is your answer. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

Part (d)

(C - B) produces the highest IRR (part (a)) above. Hence, the incremental investment, makes more sense in project C. Please examine the answer of Part (c). (A - C) has the least IRR. Hence, incremental investment in A over C is not advisable. Hence, between the three proposal, proposal C makes the best economic value for ACME provided ACME has the capital to invest

jeff jeffy answered 1 year ago

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