Show all work Question(S)-2 \'oints Three alternatives have the following cost a
ID: 2803022 • Letter: S
Question
Show all work Question(S)-2 'oints Three alternatives have the following cost and annual benefit data associated with them: Data Useful Life, Years 10 First Cost Annual Benefit Annual M&O; Costs 95,000 AnnualM&O; Gradient 2,300 Salvage Value Loan Payment Alt.1 Alt. 2 10 $1,980,000 589,000 97,000 2,100 205,000 225,565 Alt .3 10 $1,650,000 435,000 91,000 1,980 $1,325,000 265,000 145,000 150,946 178,000 187,971 The loan payments are calculated using an interest rate of 10%, a life equal to the life of the machine, and a down payment of 30%. Use a be purchased. Use incremental rate of return for your analysis R of 12% and determine which machine, if any, shouldExplanation / Answer
Analysis of Alt1 Down payment $ 397,500 (0.3*1325000) A B C D E=A+B+C+D Annual Annual Salvage Loan Net Year Benefit M& O Cost Value Repayment Benefit 1 $265,000 ($95,000) $0 ($150,946) $19,054 2 $265,000 ($97,300) $0 ($150,946) $16,754 3 $265,000 ($99,600) $0 ($150,946) $14,454 4 $265,000 ($101,900) $0 ($150,946) $12,154 5 $265,000 ($104,200) $0 ($150,946) $9,854 6 $265,000 ($106,500) $0 ($150,946) $7,554 7 $265,000 ($108,800) $0 ($150,946) $5,254 8 $265,000 ($111,100) $0 ($150,946) $2,954 9 $265,000 ($113,400) $0 ($150,946) $654 10 $265,000 ($115,700) $145,000 ($150,946) $143,354 Analysis of Alt2 Down payment $ 594,000 (0.3*1,980,000) A B C D E=A+B+C+D Annual Annual Salvage Loan Net Year Benefit M& O Cost Value Repayment Benefit 1 $589,000 ($97,000) $0 ($225,565) $266,435 2 $589,000 ($99,100) $0 ($225,565) $264,335 3 $589,000 ($101,200) $0 ($225,565) $262,235 4 $589,000 ($103,300) $0 ($225,565) $260,135 5 $589,000 ($105,400) $0 ($225,565) $258,035 6 $589,000 ($107,500) $0 ($225,565) $255,935 7 $589,000 ($109,600) $0 ($225,565) $253,835 8 $589,000 ($111,700) $0 ($225,565) $251,735 9 $589,000 ($113,800) $0 ($225,565) $249,635 10 $589,000 ($115,900) $205,000 ($225,565) $452,535 Analysis of Alt3 Down payment $ 495,000 (0.3*1,650,000) A B C D E=A+B+C+D Annual Annual Salvage Loan Net Year Benefit M& O Cost Value Repayment Benefit 1 $435,000 ($91,000) $0 ($187,971) $156,029 2 $435,000 ($92,980) $0 ($187,971) $154,049 3 $435,000 ($94,960) $0 ($187,971) $152,069 4 $435,000 ($96,940) $0 ($187,971) $150,089 5 $435,000 ($98,920) $0 ($187,971) $148,109 6 $435,000 ($100,900) $0 ($187,971) $146,129 7 $435,000 ($102,880) $0 ($187,971) $144,149 8 $435,000 ($104,860) $0 ($187,971) $142,169 9 $435,000 ($106,840) $0 ($187,971) $140,189 10 $435,000 ($108,820) $178,000 ($187,971) $316,209 INCREMENTAL RATE OF RETURN NETWEEN ALT1 AND ALT3 A B C=B-A Year Alt1 Alt3 Difference 0(Down payment) $ (397,500) $ (495,000) $ (97,500) 1 $19,054 $156,029 $ 136,975 2 $16,754 $154,049 $ 137,295 3 $14,454 $152,069 $ 137,615 4 $12,154 $150,089 $ 137,935 5 $9,854 $148,109 $ 138,255 6 $7,554 $146,129 $ 138,575 7 $5,254 $144,149 $ 138,895 8 $2,954 $142,169 $ 139,215 9 $654 $140,189 $ 139,535 10 $143,354 $316,209 $ 172,855 IncrementalInternal rate of return IncrementalIRR 141% MARR 12% ALT 3 is selected INCREMENTAL RATE OF RETURN NETWEEN ALT2 AND ALT3 A B C=B-A Year Alt3 Alt2 Difference 0(Down payment) $ (495,000) $ (594,000) $ (99,000) 1 $ 156,029 $266,435 $ 110,406 2 $ 154,049 $264,335 $ 110,286 3 $ 152,069 $262,235 $ 110,166 4 $ 150,089 $260,135 $ 110,046 5 $ 148,109 $258,035 $ 109,926 6 $ 146,129 $255,935 $ 109,806 7 $ 144,149 $253,835 $ 109,686 8 $ 142,169 $251,735 $ 109,566 9 $ 140,189 $249,635 $ 109,446 10 $ 316,209 $452,535 $ 136,326 IncrementalInternal rate of return IncrementalIRR 111% MARR 12% ALT 2 is selected CONCLUSION: ALT 2 SHOULD BE PURCHASED