Wayward Airfreight, Inc. has asked you to determine whether they should purchase

Question

1. Wayward Airfreight, Inc. has asked you to determine whether they should purchase a new automatic parcel sorter or whether they should wait to invest their capital. You have obtained the bids shown in the table below.
   Data SHIP-R SORT-OF U-SORT-M Useful Life, Years 7 7 7 First Cost (FC) $184,000 $235,000 $180,000 Salvage Value (SV) $38,300 $44,800 $14,400 Annual Benefit (AB) $75,300 $89,000 $68,000 M&O COST (M&O) $21,000 $21,000 $12,000
   Use incremental rate of return to determine which alternative to choose. Use a MARR of 15%. A. SHIP-R B. Wait (do nothing now) C. SORT-OF D. U-SORT-OF

Wayward Airfreight, Inc. has asked you to determine whether they should purchase a new automatic parcel sorter or whether they should wait to invest their capital. You have obtained the bids shown in the table below.
Data SHIP-R SORT-OF U-SORT-M Useful Life, Years 7 7 7 First Cost (FC) $184,000 $235,000 $180,000 Salvage Value (SV) $38,300 $44,800 $14,400 Annual Benefit (AB) $75,300 $89,000 $68,000 M&O COST (M&O) $21,000 $21,000 $12,000
Use incremental rate of return to determine which alternative to choose. Use a MARR of 15%. A. SHIP-R B. Wait (do nothing now) C. SORT-OF D. U-SORT-OF Wayward Airfreight, Inc. has asked you to determine whether they should purchase a new automatic parcel sorter or whether they should wait to invest their capital. You have obtained the bids shown in the table below.
Data SHIP-R SORT-OF U-SORT-M Useful Life, Years 7 7 7 First Cost (FC) $184,000 $235,000 $180,000 Salvage Value (SV) $38,300 $44,800 $14,400 Annual Benefit (AB) $75,300 $89,000 $68,000 M&O COST (M&O) $21,000 $21,000 $12,000
Use incremental rate of return to determine which alternative to choose. Use a MARR of 15%.
Use incremental rate of return to determine which alternative to choose. Use a MARR of 15%. SHIP-R Wait (do nothing now) SORT-OF U-SORT-OF Data SHIP-R SORT-OF U-SORT-M Useful Life, Years 7 7 7 First Cost (FC) $184,000 $235,000 $180,000 Salvage Value (SV) $38,300 $44,800 $14,400 Annual Benefit (AB) $75,300 $89,000 $68,000 M&O COST (M&O) $21,000 $21,000 $12,000

Explanation / Answer

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.

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