A needed service can be bought for $550 per unit. The same service can be provid

Question

A needed service can be bought for $550 per unit. The same service can be provided by equipment that costs $225,000, has a salvage value of $75,000 at the end of 10 years and costs $21,500 annually plus $35 per unit to operate.

a. a. What is the incremental IRR (Internal Rate of Return) on the investment for an annual volume of 500 parts?

b. b. What is the incremental IRR (Internal Rate of Return) for an annual volume of 375?

c. c. If the company uses a MARR (Minimal Acceptable Rate of Return) of 15%, which alternative would it select for each of the cases above?

This is what my equation(s) looks like (I KNOW THIS IS CORRECT):

a) 500*550 = 225,000(A/P IRR n) + 500 * 35 + 21,000 - S(A/F IRR n)

275,000 = 225,000(A/P IRR 10) + 500 * 35 + 21,000 - 75,000(A/F IRR 10)

275,000 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 500 * 35 +21,000 - 75,000[i/((1+i)^n-1)]

b) Same thing, just using 375.

375*550 = 225,000(A/P IRR n) + 375 * 35 + 21,000 - S(A/F IRR n)

187,500 = 225,000(A/P IRR 10) + 375 * 35 + 21,000 - 75,000(A/F IRR 10)

187,500 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 375 * 35 +21,000 - 75,000[i/((1+i)^n-1)]

I need to solve for i in both a) and b)

c) Just compares the answer recieved from a) and the answer received from b)

PLEASE SHOW ALL WORK AND STEPS IN SOLVING THIS PROBLEM. ANSWERS WITH NO WORK WILL RECIEVE NO STARS, THANKS!

Explanation / Answer

A needed service can be bought for $550 per unit. The same service can be provided by equipment that costs $225,000, has a salvage value of $75,000 at the end of 10 years and costs $21,500 annually plus $35 per unit to operate.

a. a. What is the incremental IRR (Internal Rate of Return) on the investment for an annual volume of 500 parts?

a) 500*550 = 225,000(A/P IRR n) + 500 * 35 + 21,000 - S(A/F IRR n)
275,000 = 225,000(A/P IRR 10) + 500 * 35 + 21,000 - 75,000(A/F IRR 10)
275,000 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 500 * 35 +21,000 - 75,000[i/((1+i)^n-1)]

b. b. What is the incremental IRR (Internal Rate of Return) for an annual volume of 375?

b) Same thing, just using 375.
375*550 = 225,000(A/P IRR n) + 375 * 35 + 21,000 - S(A/F IRR n)
187,500 = 225,000(A/P IRR 10) + 375 * 35 + 21,000 - 75,000(A/F IRR 10)
187,500 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 375 * 35 +21,000 - 75,000[i/((1+i)^n-1)]

c. c. If the company uses a MARR (Minimal Acceptable Rate of Return) of 15%, which alternative would it select for each of the cases above?

$550 per unit would be the better option for both a) and b)

I hope that you found this answer useful towards your studies. It took a considerable amount of thought, time, and effort to compose, and and I'd sincerely appreciate a lifesaver rating! It would really make my day! :)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.