A large corporate office is considering rearranging their cubicles to improve wo

Question

A large corporate office is considering rearranging their cubicles to improve workflow. The EBB arrangement would initially cost $110,000 to implement but would result in an annual savings of $12,500. The FLOW arrangement would initially cost $135,000 but would result in an annual savings of $15,000. Assume the MARR= 10% and the arrangement and annual savings would last for many, many years. What is the internal rate of return of each arrangement (in percent to three decimal places like 8.995%)? Based on rate of return analysis, which system should be chosen and why?

Explanation / Answer

For EBB arrangement :

Present value of savings at 10% = 12500/.10 = $125000

Present value of savings at 12% = 12500/.12 = 104166.67

IRR =LDR+[(PV@LDR-Initial cost)(HDR-LDR)] /[PV@LDR-PV@HDR]

      = 10 + [125000-110000)(12-10)]/[125000-104166.67]

      = 10+ [15000*2/ 20833.33]

       = 10 + 1.44

        = 11.44%

For Flow arrangement :

At 10% savings = 15000/.10 = $150000

At 12% ,savings = 15000/.12 = $ 125000

IRR = 10+ [(150000-135000)(12-10)/ (150000--125000)]

     = 10 + [15000*2 / 25000]

   = 10 + 1.2

    = 11.20%

EBB arrangement should be chosen as IRR is higher under that alternative

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