Q4. Consider the following cost alternatives with 10 year useful lives. The comp

Question

Q4. Consider the following cost alternatives with 10 year useful lives. The company has a MARR = 15%.

Alternative

A

B

C

D

E

F

Initial Investment

50000

55000

60000

65000

70000

75000

Annual O&M Costs

10000

9000

8300

7200

6600

5500

Salvage Value

35000

38000

41000

44000

47000

50000

a)    Using suitable Excel functions, perform an incremental IRR analysis to determine the best alternative. Clearly lay out each step of the analysis and its conclusion.

b)    Using suitable Excel functions, perform an incremental ERR analysis to determine the best alternative. Use an external borrowing/re-investment rate of e = 12%. Clearly lay out each step of the analysis and its conclusion.

c)    Compare the results of your analyses in Parts (a) and (b) and discuss the reason behind any differences.

Alternative

A

B

C

D

E

F

Initial Investment

50000

55000

60000

65000

70000

75000

Annual O&M Costs

10000

9000

8300

7200

6600

5500

Salvage Value

35000

38000

41000

44000

47000

50000

Explanation / Answer

a) D.F. = 0 C.D.F. = 5.019 D.F. = 0.247 Outflow (A) Annual O/M Cost (B) Salvage Value discounted Outflow cumulative Dicounted Annual O/M Dicounted Salvage Value Net Present Value A -50000 -10000 35000 -50000.00 -50190 8645 -91545.00 B -55000 -9000 38000 -55000.00 -45171 9386 -90785.00 C -60000 -8300 41000 -60000.00 -41657.7 10127 -91530.70 D -65000 -7200 44000 -65000.00 -36136.8 10868 -90268.80 E -70000 -6600 47000 -70000.00 -33125.4 11609 -91516.40 F -75000 -5500 50000 -75000.00 -27604.5 12350 -90254.50 So Less Cost is in Case of F so best Case is F

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