Problem 2 A small landfill is considering three different methods for sorting an

Question

Problem 2 A small landfill is considering three different methods for sorting and removing recydlable ma the waste stream or they could do nothing, however, they would lose valuable landfill space. This of income method are listed below. All methods have a 10-year life. The MARR is 10% per year. If only one alternative is to be used, which one alternative should be selected using IROR incremental analysis? (You do not need is the winner and loser. Identify the winner and loser for each comparison.) loss is estimated to be $4,000 per year. The investment costs and incomes associated with each to find each IROR value for each comparison as long as you can determine which one A -labor method B- Magnet method C-Scanner method Initial Cost $40,000$50,000 $55,000 881 Annual Income $7,000 and increases $12,000 $24,000 $500 per year after year 1 $2,000$3 $3,000 $4,000 Salvage Value

Explanation / Answer

In all 3 methods, the loss of income of $4000 per year will be saved. Hence this amount is not relevant for comparison of the 3 methods. The cash flows of the 3 options are hence computed as under alongwith an incremental comparison of the cash flows of different options. Note that the last year cash flows include salvage value.

Accordingly, C is the best option since its IROR is higher than both A and B. B comes next since its IROR is higher than A and A is the least attractive. IROR is computed using the IRR function as =IRR(cash flows from year 0-10)

Since the lives and MARR of the 3 options is the same, we can also find the winner or loser without calculating the IROR by just comparing the net incremental cash flows. By this way also the ranking will be C,B and A

Method A B C A/B A/C B/C Year Cash flows Incremental cash flows 0 -40000 -50000 -55000 -10000 -15000 -5000 1 7000 12000 24000 5000 17000 12000 2 7500 12000 24000 4500 16500 12000 3 8000 12000 24000 4000 16000 12000 4 8500 12000 24000 3500 15500 12000 5 9000 12000 24000 3000 15000 12000 6 9500 12000 24000 2500 14500 12000 7 10000 12000 24000 2000 14000 12000 8 10500 12000 24000 1500 13500 12000 9 11000 12000 24000 1000 13000 12000 10 13500 15000 28000 1500 14500 13000 Net cash flows 18500 134500 116000 IRR 37% 110% 240%

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