Part D. Forget the retirement plan and call the office (ASAP) After spending Fri
ID: 1203303 • Letter: P
Question
Part D. Forget the retirement plan and call the office (ASAP)
After spending Friday morning with his Financial Advisor’s, Charles realized that his boss has been calling and texting him asking for the final decision to include in Monday morning presentation to the finance and accounting committee.
Three different alternatives (Flow-122, Flow-155, and Flow-264) are under consideration for improving material flow in a production process. All the alternatives are considered to have the same life of 20 years.
Based on the information provided in the following table (1);
After completing the first analysis, Charles’s received a new text: “Sorry… wrong data… suppliers made a mistake and quoted wrong prices for each of the machines… prepare analysis with half of the initial cost.” Assuming that the initial investment data is corrected (see table 2),
Table 2. Proposal- Improving Material Flow-Revised
Proposal
Initial Investment ($)
Operating Cost, ($/year)
Annual Income ($/year)
Flow-122
-20,000
-2,000
+4,000
Flow-155
-23,000
-1,000
+5,000
Flow-264
-30,500
-500
+8,000
2. If the alternatives are mutually excusive, which alternative should Charles recommend using the ROR analysis is 20% per year? If the alternatives are independent, which one(s) should be selected if the company MARR is now 15%? (2pts)
Proposal
Initial Investment ($)
Operating Cost, ($/year)
Annual Income ($/year)
Flow-122
-20,000
-2,000
+4,000
Flow-155
-23,000
-1,000
+5,000
Flow-264
-30,500
-500
+8,000
Explanation / Answer
Working notes:
(a) Annual net benefit ($) = Income - Operating cost
Flow-122: (4,000 - 2,000) = 2,000
Flow-155: (5,000 - 1,000) = 4,000
Flow-264: (8,000 - 500) = 7,500
(b) ROR (IRR) is found out using approximation method:
The approximation method of IRR (ROR) is:
R0R = RL + [NPVL / (NPVL - NPVH)] x (RH - RL) where
RH: Higher interest rate = 12% (assumed),
RL: Lower interest rate = 6% (assumed)
NPVH: NPV at higher rate
NPVL: NPV at lower rate
(1) Flow 122
ROR = 6% + [2,940 / (2,940 + 5,061)] x (12 - 6)%
= 6% + (2,940 / 8,001) x 6%
= 6% + 2.2%
= 8.2%
(2) Flow 155
ROR = 6% + [22,880 / (22,880 - 6,878)] x 6%
= 6% + (22,880 / 16,002) x 6%
= 6% + 8.58%
= 14.58%
(3) Flow 264
ROR = 6% + [55,524 / (55,524 - 25,521)] x 6%
= 6% + [55,524 / 30,003] x 6%
= 6% + 11.1%
= 17.1%
CONCLUSION
(a) If alternatives are mutually exclusive, the one with highest ROR should be chosen, i.e. Flow-264.
(b) If projects are independent, all alternatives having ROR higher than 15% should be chosen, i.e. Flow-264.
FLOW 122 Year Cost Revenue Net Benefit Discount factor@6% Discounted Net Benefit Discount factor@12% Discounted Net Benefit (A) (B) (C)=(B)-(A) (D) (C) x (D) (E) (C) x (E) 0 20,000 -20,000 1.0000 -20,000 1.0000 -20,000 1 2,000 4,000 2,000 0.9434 1,887 0.8929 1,786 2 2,000 4,000 2,000 0.8900 1,780 0.7972 1,594 3 2,000 4,000 2,000 0.8396 1,679 0.7118 1,424 4 2,000 4,000 2,000 0.7921 1,584 0.6355 1,271 5 2,000 4,000 2,000 0.7473 1,495 0.5674 1,135 6 2,000 4,000 2,000 0.7050 1,410 0.5066 1,013 7 2,000 4,000 2,000 0.6651 1,330 0.4523 905 8 2,000 4,000 2,000 0.6274 1,255 0.4039 808 9 2,000 4,000 2,000 0.5919 1,184 0.3606 721 10 2,000 4,000 2,000 0.5584 1,117 0.3220 644 11 2,000 4,000 2,000 0.5268 1,054 0.2875 575 12 2,000 4,000 2,000 0.4970 994 0.2567 513 13 2,000 4,000 2,000 0.4688 938 0.2292 458 14 2,000 4,000 2,000 0.4423 885 0.2046 409 15 2,000 4,000 2,000 0.4173 835 0.1827 365 16 2,000 4,000 2,000 0.3936 787 0.1631 326 17 2,000 4,000 2,000 0.3714 743 0.1456 291 18 2,000 4,000 2,000 0.3503 701 0.1300 260 19 2,000 4,000 2,000 0.3305 661 0.1161 232 20 2,000 4,000 2,000 0.3118 624 0.1037 207 NPV = 2,940 NPV = -5,061Related Questions
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