QUESTION 7 Based on the table showing 3 mutually exclusive alternatives X, Y, an

Question

QUESTION 7 Based on the table showing 3 mutually exclusive alternatives X, Y, and Z, which is the correct order for performing incremental analysis? Purchase price Net annual savings Useful life (years Investment XInvestment Y $30,000 $11,500 $25,000 8,000 5 Investment Z $20,000 7,500 a. Compare X against "Do nothing"then the preferred against Y then the preferred against Z b. Compare Y against "Do nothing" then the preferred against X then the preferred against Z C. Compare Z against "Do nothing" then the preferred against X then the preferred against Y d. Choose the alternative with the highest IRR assuming IRR> MARFR QUESTION 8 Based on the table and assuming MARR-18%, is Investment Z economically feasible? Purchase price Net annual savings Useful life (years Investment X Investment YInvestment Z 20,000 ,500 25,000 8,000 $30,000 $11,500 a. Yes, because NPW>0 when i = 18% O b. Yes, because NPW0 when i-18% O d. No, because NPW incremental PWc when i 18% O b. Yes, because incremental PVvb incremental PWc when i : 18% O d. No, because incremental PWb

Explanation / Answer

7.

C

The incremental analysis starts with the alternative that has lowest capital investment, then it moves up the order with next highest capital investment alternative. On this basis, it is the alternative Z, then X , then Y to be used in incremental analysis.

8.

A

Working Note:

Net present value of Z = 7500*(1-1/1.18^5)/.18 – 20000

Net present value of Z = $3453.78

Here, Net present value of Z is greater than zero at 18% rate.

9.

D

Working note:

Incremental investment = 25000-20000 = $5000

Incremental annual benefits = $500

So,

Net present value of the incremental benefits = 500*(1-1/1.18^5)/.18 - 5000

Net present value of the incremental benefits = -$3436.41

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