5. Far-out Airfreight Inc. has asked you to recommend a new automatic parcel sor

Question

5. Far-out Airfreight Inc. has asked you to recommend a new automatic parcel sorter, You have obtained the following mutually exclusive bids: SHIP-R SORT-OF U-SORT-M Initial Cost $185,000 $231,000 $178,000 Salvage Value 39,100 43,500 14,400 Annual Benefit 72,500 85,000 69,700 Yearly maintenance and operating costs 20,100 21,000 13,400 Useful life (years) 7 7 7

a. Using a MARR of 12%, determine the net present value of each alternative. Please report to the nearest dollar.

b. What is the internal rate of return (IRR) of each alternative? Please report to the tenths decimal place.

c. Based solely on the results of 5 a. and 5 b., and a MARR of 12%, which alternative(s) would you select and why (do nothing is a fourth alternative)?

Please dont use excel so I can see how you did it

Explanation / Answer

a) Statement showing NPV

b) Statement showing IRR

IRR is the rate where NPV is 0 at 22.7085% it comes to 0, thus IRR = 22.7085%

For SORT-OF

Thus IRR = 21.7525

For U-SORT-M

Thus IRR = 25.6535%

C) Since all projects are mutually exclusive, acceptance of one project will mean other two projects will be rejected

In such case we will select project with highest NPV Though IRR states different project. we follow NPV approach in case of conflict between IRR and NPV as IRR assumes that cash flow generated from investment project are re invested at IRR which may not hold true in future

Thus u SORT-M should be selected

Particulars SHIP-R SORT-OF U-SORT-M Annual benefits 72500 85000 69700 Maintenance and operating expe 20100 21000 13400 Cash inflow 52400 64000 56300 PVIFA(12%,7years) 4.564 4.564 4.564 PV of cash inflow (Cash inflow*PVIFA) 239141 292080 256939 PV of salvage value 39100*0.4523 17687 43500*0.4523 19677 14400*0.4523 6514 PV of all cash inflow 256828 311758 263453 Less: Initial investment 185000 231000 178000 NPV 71828 80758 85453

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