Question (3-120 points) purchase of a new commercial lawn mower. Don Garlits is
ID: 2456746 • Letter: Q
Question
Question (3-120 points) purchase of a new commercial lawn mower. Don Garlits is a landscaper. He is considering the below provides all Two machines are being considered, the Atlas and Zippy. The table shown return is 8%. necessary information for the two machines. The minimum attractive rate of a) Determine the rate of return on the Atlas mower (to the nearest 1%) b) Does of return on Zippy mower exceed the MARR? Purchase. c) Use incremental rate of return analysis to decide which Machine to Zippy Atlas S16,900 S6,700 Initial cost S1,200 S1,500 Annual operation and maintenance S4,500 SA,000 Annual Benefit S1,000 S3,500 Salvage Value Useful lifeExplanation / Answer
Note: as there is no tax, there will be no advantage of depreciation and the cash flow for both the project has been calculated by:
cash inflow = Annual Benefit - Annual Opearation & Maintenance
a)
Using the interpolation the IRR (internal rate of return) is calculated as follows. It is to be noted that IRR is the discounting rate at which NPV of the project is zero.
IRR = 5% + (15%-5%)*((0-972)/(-334-972)) = 12.44%
b)
Calculation of IRR.
IRR = 5% + (15%-5%)*((0-2462)/(-2898-2462)) = 9.59% > MARR (8%)
c)
Incremental IRR = 5% + (15%-5%)*((0-650)/(-2344-650)) = 7.17% < MARR
The decision criteria is:
If the inremental IRR > MARR, choose the higher first cost
if the incremental IRR < MARR, choose the lower first cost.
Here Incremental IRR < MARR, hence , Atlas should be choosen subject to the condition, that both project are acceptable on the basis of individual IRR analysis (in a and b we have shown that both Atlas and Zippy satisfy this condition)
Year particulars cash flow Discount factor @ 5% Discounted cash flow Discount factor @ 15% discounted cash flow 0 Initial cost -6700 1 -6700 1 -6700 1 Cash inflow 2500 0.952380952 2381 0.869565217 2174 2 2500 0.907029478 2268 0.756143667 1890 3 2500 0.863837599 2160 0.657516232 1644 3 Salvage Value 1000 0.863837599 864 0.657516232 658 NPV 972 -334