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Two mutually exclusive cost alternatives , Machine A and Machine B, are being ev

ID: 2556496 • Letter: T

Question

Two mutually exclusive cost alternatives, Machine A and Machine B, are being evaluated.

Given the following time events and incremental cash flow, if the MARR is 12% per year, which alternative (Machine A or Machine B) should be selected on the basis of the incremental rate of return analysis? Assume Machine B requires the extra $10,000 initial investment. (You can use Excel).

                                                                                                                     

Year

Incremental Cash Flow ($)
(Machine B - Machine A)

0

-10,000

1 - 4


1,300

5 - 7

3,200

8

4,500

                                                                                                                        

Question options:

The "Incremental ROR" is more than MARR so select, Machine A

The "Incremental ROR" is more than MARR, so select Machine B

Select neither A nor B and go with DN

The "Incremental ROR" is less than MARR, so select Machine A

Year

Incremental Cash Flow ($)
(Machine B - Machine A)

0

-10,000

1 - 4


1,300

5 - 7

3,200

8

4,500

Explanation / Answer

Answer = CALCULATION OF THE INCREAMENTAL PRESENT VALUE (Machine B - Machien A ) With MARR@ 12% Year   Cash Flow PVF @ 12%   Present Value   0 $   -10,000.00                                          1.0000 $       -10,000.00 1 $       1,300.00                                          0.8929 $           1,160.71 2 $       1,300.00                                          0.7972 $           1,036.35 3 $       1,300.00                                          0.7118 $               925.31 4 $       1,300.00                                          0.6355 $               826.17 5 $       3,200.00                                          0.5674 $           1,815.77 6 $       3,200.00                                          0.5066 $           1,621.22 7 $       3,200.00                                          0.4523 $           1,447.52 8 $       4,500.00                                          0.4039 $           1,817.47 Total Present Value   $               650.53 Answer = Option 2 = "Increamental ROR" is more than MARR , So select Machiene B

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