Question
Problem 1 A small manufacturing company is considering the addition of one product line (Mutually Exclusive alternatives). If the total amount of investment capital available for any of the product line of choice is shown on the table below, which one should the company undertake on the basis of rate of return? Assume the company uses a 5-year project recovery period and a MARR of 20% per year. All cash flow estimates are in $1000 units The rate of return must be determine using trial and error method Product Lines T3 S2 U4 RI -500-400-700-200 First cost, S M&O; cost, S/year -400-300-400-200 Revenue, S/year 630 485 699 320 NB: The incremental rate of return 1* must be determine using trial and error method. First comparison: two guess values are 50% and 60% Second comparison: two guess values are 18% and 19% Third comparison: two guess values are 24% and 25% Fourth comparison: two guess values are 21% and 22% You can use this website to calculate P/F,F/P, P/A, A/P, F/A, A/F for any percentage i (e.g. 50%, 60%) ttps://www.me.utexas lator.html .edu/m esources/flash/fa cal
Explanation / Answer
Incremental IRR 50% &60% T3-S2 T3-U4 T3-R1 S2-U4 S2-R1 U4-R1 Inc. Initial Cost -100 200 -400 300 -200 -500 Inc. Annual Inflow 45 -69 185 -114 65 179 Dis. Factor 50% 1.736626 1.736626 1.736626 1.736626 1.736625514 1.736626 Disc Fact 60% 1.507721 1.507721 1.507721 1.507721 1.507720947 1.507721 PV at 50% 78.14815 -119.827 321.2757 -197.975 112.8806584 310.856 PV at 60% 67.84744 -104.033 278.9284 -171.88 98.00186157 269.882 NPV at 50% -21.8519 80.17284 -78.7243 102.0247 -87.11934156 -189.144 NPV at 60% -32.1526 95.96725 -121.072 128.1198 -101.9981384 -230.118 Inremental IRR not exist in between 50% & 60% Incremental IRR 18%&19% T3-S2 T3-U4 T3-R1 S2-U4 S2-R1 U4-R1 Inc. Initial Cost -100 200 -400 300 -200 -500 Inc. Annual Inflow 45 -69 185 -114 65 179 Dis. Factor 18% 3.127171 3.127171 3.127171 3.127171 3.127171021 3.127171 Disc Fact 19% 3.057635 3.057635 3.057635 3.057635 3.05763489 3.057635 PV at 18% 140.7227 -215.775 578.5266 -356.497 203.2661164 559.7636 PV at 19% 137.5936 -210.977 565.6625 -348.57 198.7462678 547.3166 NPV at18% 40.72 (15.77) 178.53 (56.50) 3.27 59.76 NPV at 19% 37.59 (10.98) 165.66 (48.57) (1.25) 47.32 Inremental IRR between (S2-R1) at 18% & 19% =18+3.27/(3.27+1.25)*(19-18) 18.72 % for rest Incremental IRR not exist in between 18% & 19% Incremental IRR 24% & 25% T3-S2 T3-U4 T3-R1 S2-U4 S2-R1 U4-R1 Inc. Initial Cost -100 200 -400 300 -200 -500 Inc. Annual Inflow 45 -69 185 -114 65 179 Dis. Factor 24% 2.745384 2.745384 2.745384 2.745384 2.745384416 2.745384 Disc Fact 25% 2.68928 2.68928 2.68928 2.68928 2.68928 2.68928 PV at 24% 123.5423 -189.432 507.8961 -312.974 178.449987 491.4238 PV at 25% 121.0176 -185.56 497.5168 -306.578 174.8032 481.3811 NPV at 24% 23.54 10.57 107.90 (12.97) (21.55) (8.58) NPV at 25% 21.02 14.44 97.52 (6.58) (25.20) (18.62) Inremental IRR not exist in between 24% & 25% Incremental IRR 21% & 22% T3-S2 T3-U4 T3-R1 S2-U4 S2-R1 U4-R1 Inc. Initial Cost -100 200 -400 300 -200 -500 Inc. Annual Inflow 45 -69 185 -114 65 179 Dis. Factor 21% 2.925984 2.925984 2.925984 2.925984 2.925984336 2.925984 Disc Fact 22% 2.86364 2.86364 2.86364 2.86364 2.863639762 2.86364 PV at 21% 131.6693 -201.893 541.3071 -333.562 190.1889818 523.7512 PV at 22% 128.8638 -197.591 529.7734 -326.455 186.1365845 512.5915 NPV at 21% 31.67 (1.89) 141.31 (33.56) (9.81) 23.75 NPV at 22% 28.86 2.41 129.77 (26.45) (13.86) 12.59 Incremental IRR not exist in between 21%&22%
