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The incremental cash flow between alternatives Z1 and Z2 is shown below (Z2 has

ID: 1178203 • Letter: T

Question

The incremental cash flow between alternatives Z1 and Z2 is shown below (Z2 has the higher initial cost). Use an AW-based rate of return equation to determine the incremental rate of return and which alternative should be selected, if the MARR is 17% per year. Let k = year 1 through 10. Draw Cash Flow Diagram as well.

Incremental

Year

Cash Flow,   $(Z2 %u2013 Z1)

0

%u201340,000

1%u201310

9000 %u2013 500k   

  

     

Incremental

     

Year

     

Cash Flow,   $(Z2 %u2013 Z1)

     

0

     

%u201340,000

     

1%u201310

     

9000 %u2013 500k   

  

Explanation / Answer

0 = -40,000(A/P,i,10) + 8500 %u2013 500(A/G,i,10)

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i = 10.5% is < MARR = 17%

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