Minimum Attractive Rate of Return: Use Present Worth analysis and determine whic
ID: 465784 • Letter: M
Question
Minimum Attractive Rate of Return: Use Present Worth analysis and determine which of the following two machines should be selected based on their incremental cash flows and a minimum attractive rate of return (MARR) of 11% per year. Compute the actual rate of return to within plus or minus 0.1% using Microsoft EXCEL.
Please show what it would look like in EXCEL.
Item Machine A Machine B First cost, $ -43,000 -65,000 Annual operating cost, $/year -14,500 -9,000 Salvage value, $ 10,500 17,000 Life, years 5 10Explanation / Answer
The salvage values are assumed to be a “negative” cost. So we use ‘+’ sign before them.
Minimum Attractive Rate of Return (MARR) = 11% per year.
For machine A, an estimate of equivalent service for additional 5 years is required. Let us consider this to be relatively expensive at $ 30,000 per year.
Let present worth of machine A = PWA.
Let present worth of machine B = PWB.
PWA = – 43,000 – 14,500 (P/A, 11%, 5) + 10,500 (P/F, 11%, 5) – 30,000 (P/A, 11%, 5) . (P/F, 11%, 5)
= – 43,000 – 14,500 x 3.696 + 10,500x 0.593 – 30,000 x 3.696 x 0.593
= $ – 1,56,117.34.
PWB = – 65,000 – 9,000 (P/A, 11%, 10) + 17,000 (P/F, 11%, 10)
= – 65,000 – 9,000 x 5.889 + 17,000x 0.352
= $ – 1,12,017.
Machine B is selected since the present worth (PW) of its costs is lower (i.e., less negative value) than that of machine A.