Work the Problem in Excel A firm is considering an investment in a robotic trans
ID: 2474739 • Letter: W
Question
Work the Problem in Excel
A firm is considering an investment in a robotic transfer cell needed for an eight (8) year project life. Three alternatives are under consideration. The firm uses an 18% MARR. The cash flows of the alternatives are as follows:
Cash Flow A B C
Initial cost $20,800 $14,700 $23,250
O & M costs / year $ 2,650 $ 2,750 $ 1,100
Annual cost savings $ 7,700 $ 7,500 $ 6,500
Salvage value $ 3,825 $ 4,125 $ 5,600
Technical life – years 8 4 8
Using incremental rate of return analysis, determine which alternative the firm should select.
Explanation / Answer
NPV of Project A:
Year
Cash flows
Discounting
factor @18%
Discounted
cash flows
0
$ (20,800)
1
$ (20,800.00)
1
$ 5,050
0.84746
$ 4,279.67
2
$ 5,050
0.71818
$ 3,626.81
3
$ 5,050
0.60863
$ 3,073.58
4
$ 5,050
0.51579
$ 2,604.74
5
$ 5,050
0.43711
$ 2,207.41
6
$ 5,050
0.37043
$ 1,870.67
7
$ 5,050
0.31393
$ 1,585.35
8
$ 8,875
0.26604
$ 2,361.11
NPV
$ 809.33
Therefore, NPV of project A is $809.33.
NPV of Project B:
Year
Cash flows
Discounting
factor @18%
Discounted
cash flows
0
$ (14,700)
1
$ (14,700.00)
1
$ 4,750
0.84746
$ 4,025.44
2
$ 4,750
0.71818
$ 3,411.36
3
$ 4,750
0.60863
$ 2,890.99
4
$ 8,875
0.51579
$ 4,577.64
NPV
$ 205.42
Therefore, NPV of project B is $205.42.
NPV of Project c:
Year
Cash flows
Discounting
factor @18%
Discounted
cash flows
0
$ (23,250)
1
$ (23,250.00)
1
$ 5,400
0.84746
$ 4,576.28
2
$ 5,400
0.71818
$ 3,878.17
3
$ 5,400
0.60863
$ 3,286.60
4
$ 5,400
0.51579
$ 2,785.27
5
$ 5,400
0.43711
$ 2,360.39
6
$ 5,400
0.37043
$ 2,000.32
7
$ 5,400
0.31393
$ 1,695.22
8
$ 11,000
0.26604
$ 2,926.44
NPV
$ 258.70
Therefore, NPV of project B is $258.70.
Decision:
Therefore, Project A would be accepted due to have high NPV i.e., $809.33
Year
Cash flows
Discounting
factor @18%
Discounted
cash flows
0
$ (20,800)
1
$ (20,800.00)
1
$ 5,050
0.84746
$ 4,279.67
2
$ 5,050
0.71818
$ 3,626.81
3
$ 5,050
0.60863
$ 3,073.58
4
$ 5,050
0.51579
$ 2,604.74
5
$ 5,050
0.43711
$ 2,207.41
6
$ 5,050
0.37043
$ 1,870.67
7
$ 5,050
0.31393
$ 1,585.35
8
$ 8,875
0.26604
$ 2,361.11
NPV
$ 809.33
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