Inc. is investing in one of two alternatives for increasing the of its linear mo
ID: 1123100 • Letter: I
Question
Inc. is investing in one of two alternatives for increasing the of its linear motor actuators. The first of $175,000 and its cash flows exhibit an annual rate of return of rx-18% The second, an initial of $115,000 and its cash flows have an annual rate of return of rY-22% Schneeberger's MAR is 20% per year. An er the follo ing smaller than PX? (b) What is the expected PX.Y questions, (a) Will the rate of return on the incremental investment in X be larger or The rate of return on the increment is [less than ] 18% per year.Explanation / Answer
EOY
X
Y
X – Y
0
-175,000
-115,000
-60,000
1
206,500
[= 175,000 × (1+18%)]
140,300
[= 115,000 × (1+22%)]
66,200
Incremental rate of return = (66,200 – 60,000)/60,000 = 0.1033 = 10.33%
Less than.
EOY
X
Y
X – Y
0
-175,000
-115,000
-60,000
1
206,500
[= 175,000 × (1+18%)]
140,300
[= 115,000 × (1+22%)]
66,200