Reference no: EM131541289

Capital Budgeting

Mike Moore's microbrewery is considering production of a new ale called Mike's Honey Harvest Brew. To introduce this new offering, Mike is considering two independent projects. Each of these projects has two mutually exclusive alternatives, and each alternative has a useful life of 10 years and no salvage value. Mike's MARR is 8%. Information regarding the projects and alternatives are given in the following table.

Project/Alternative	Cost	Annual Benefit
Project 1: Purchase New Fermenting Tanks
Alt. A: 5000-gallon tank	$5000	$1192
Alt. B: 15000-gallon tank	$10000	$1992
Project 2: Purchase Bottle-Filler & Capper
Alt. A: 2500-bottle/hour machine	$15000	$3337
Alt. B: 500-bottle/hour machine	$25000	$4425

Use incremental rate of return analysis to complete the following worksheet.

Proj./Alt.	Cost, P	Annual Benefit, A	(A/P, i, 10)	IRR
1A	$5000	$1192	0.2385	20%
1B-1A	$5000	$800	0.1601
2A	$15000	$3337
2B-2A	$10000

Use this information to determine:

(a) Which projects should be funded if only $15,000 is available

(b) The cutoff rate of return if only $15,000 is available

(c) Which projects should be funded if $25,000 is available