Food Processors International is trying to find a new turkey processing system.
ID: 2779928 • Letter: F
Question
Food Processors International is trying to find a new turkey processing system. They have had two options presented to them, but are having a difficult time making a decision. Both turkey processing systems have a lifespan of 10 years. The company uses a MARR of 8% to make financial decisions. The Bird3500X system has a first cost of $135,000, annual expenses of $60,000, annual savings of $80,000, and a salvage value of $5,000 at the end of the 10 years. The Plucky Time system has a first cost of $200,000, annual expenses of $80,000, annual savings of $110,000, and a salvage value of zero at the end of the 10 years. What is the incremental ROR for the two alternatives? Enter your answer without a % sign and use 2 decimal places. For example, if you calculate 5.75%, enter it as 5.75 If using Excel, be sure to format your answer for 2 decimal places.Explanation / Answer
Project Bird350DX:
PV = -135,000
PMT = 80,000 – 60,000 = 20,000
FV = 5,000
N = 10
Compute r = 8.24% (ROR or IRR)
Excel function RATE(10,20000,-135000,5000) returns 0.08244228
NPV @ 8% = -135000 + (20000/0.08)*(1 – 1/1.08^10) + 5000/1.08^10
NPV = 1517.60
Project Plucky:
PV = -200,000
PMT = 30,000
FV = 0
N = 10
Compute r = 8.14%
Excel function RATE(10,30000,-200000,0) returns 0.08144166
NPV @ 8% = -200000 + (30000/0.08)*(1 – 1/1.08^10)
NPV = 1302.44
As NPV of Project Bird350DX is higher, Bird350DX is better for given MARR.