Please use the Challenger-Defender rate of return analysis (pair-wise incrementa
ID: 2781611 • Letter: P
Question
Please use the Challenger-Defender rate of return analysis (pair-wise incremental analysis)
1. Problem 837. (30 points) A firm must decide which of three alternatives to adopt to expand its capacity. The firm wishes a minimum annual profit of 20% of the initial cost of each separable increment of investment. Any money not invested in capacity expansion can be invested elsewhere for an annual yield of 20% of initial cost. A B C Alternative Initial Cost Annual Profit Profit Rate S S100,000 S30000 30% O $300,000 S66,000 22% S ISS500000 s80,000 16% O Which alternative should be selected? Use a challenger-defender rate of return analysis (pair-wise incremental analysis), HINTThe life of the investment is considered infinite (I - APExplanation / Answer
The present value of an infinite investment is calcualted as= (Annual Income/Interest Rate)
Comparing A and B
Thus alternative A should be chosen among the three.
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The present value of an infinite investment is calcualted as= (Annual Income/Interest Rate)
Comparing A and B
Incremental Initial Cost -200000 Incremental Profit 36000 Present value of profit at r=20 % for infinite life 180000 NPV -20000 As NPV is negative, so among A and B, A is a better choice Comparing A and C Incremental Initial Cost -400000 Incremental Profit 50000 Present value of profit at r=20 % for infinite life 250000 NPV -150000