A firm is considering three mutually exclusive alternatives as part of a product

Question

A firm is considering three mutually exclusive alternatives as part of a production improvement program. The alternatives are as follows: A B C Installed cost $10,000 $15,000 $20,000 Uniform annual benefit 1,625 1,625 1,890 Useful life in years 10 20 20 There is no salvage value. At the end of 10 years Alt A can be replaced with identical cost and benefits. So, The MARR is 6%. If the analysis period is 20 years, which alternative should be selected? Use ROR analysis to solve the problem. Please show steps on how you reached your conclusion so I can understand.

Explanation / Answer

Define the alternatives. 2. Determine the study period. 3. Provide estimates of the cash flows for each alternative. 4. Specify the interest rate (MARR). 5. Select the measure(s) of effectiveness (i.e.,the criteria for judging success). 6. Compare the alternatives. 7. Perform sensitivity analyses. 8. Select the preferred alternative(s).

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