3.2 Two locations of Hare Salads Restaurants are evaluated, with the projected l

Question

3.2 Two locations of Hare Salads Restaurants are evaluated, with the projected life of each facility being 10 years. The cash flows are as follows Alternative First Cost 260,000 $ 41,000 S 80,000 S 25,000 S 205,000 46,000 75,000 22,000 Maintenance & Operating Costs $ Annual Benefits Salvage Value Project life 10 10 The company uses a MARR of 10%. Using rate of retum analysis, which altemative should be selected? a) List the table of Incremental Cash Flow based on the two alternatives. [2.5 points]

Explanation / Answer

ANSWER:

A) We will subtract alternative b from alternative a as it has a higher first cost.

b) in order to find the incremental irr we will have to equate the pw to zero.

pw (a-b) = first cost + m and o costs(p/a,i,n) + annual benefits(p/a,i,n) + salvage value(p/f,i,n)

pw (a-b) = -45,000 + 5,000(p/a,i,10) + 5,000(p/a,i,10) + 3,000(p/f,i,10)

0 = -45,000 + 5,000(p/a,i,10) + 5,000(p/a,i,10) + 3,000(p/f,i,10)

45,000 = 5,000(p/a,i,10) + 5,000(p/a,i,10) + 3,000(p/f,i,10)

solving for various values of i via trial and error we get i = 18.32%

incremental irr is 18.32%

c) alternative a should be chosen as the irr is more then marr of 10% that is 18.32% > 10%

alternative a - b first cost -260,00 - (-205,000) = -45,000 m and o costs -41,000 - (-46,000) = 5,000 annual benefits 80,000 - 75,000 = 5,000 salvage value 25,000 - 22,000 = 3,000 project life 10

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