2. A firm is considering an investment in a numerical controlled milling machine

Question

2. A firm is considering an investment in a numerical controlled milling machine needed for a ten 10) 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 Initial cost O & M costs year 2,650 Annual cost savings 7,500 Salvage value Technical life -years C $23,250 1,100 S 6,500 S 7,900 AB $22,500 $17,200 S 2.750 S 7,500 S 6,125 $ 5,825 Using incremental rate of return analysis, determine which alternative the firm should elect

Explanation / Answer

Statement showing evaluation of proposal

Its better to accept proposal C

Particulars A B C MARR 18% 18% 18% Life of project 10 5 10 Cummulative PVAF 4.494 3.127 4.494 Initial cash out flow - (A) $22500 $17200 $23250 Cash inflows P.V. of cost savings $33705 $23452.50 $29211 P.V. of O & M Cost ($11909.10) ($8599.25) ($4943.40) P.V. of salvage value $1112.58 $2676.63 $1508.90 P.V. of cash inflows- (B) $22908.48 $17529.88 $25776.50 Net incremental benefit (B-A) $408.48 $329.88 $2526.5 Equalized Benefit {(B-A)/PVAF} 90.89 105.49 562.19

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