Reference no: EM13203508
A needed service can be bought for $550 per unit. The same service can be provided by equipment that costs $225,000, has a salvage value of $75,000 at the end of 10 years and costs $21,500 annually plus $35 per unit to operate.
a. What is the incremental IRR (Internal Rate of Return) on the investment for an annual volume of 500 parts?
b. What is the incremental IRR (Internal Rate of Return) for an annual volume of 375?
c. If the company uses a MARR (Minimal Acceptable Rate of Return) of 15%, which alternative would it select for each of the cases above?
This is what my equation(s) looks like:
a) 500*550 = 225,000(A/P IRR n) + 500 * 35 + 21,000 - S(A/F IRR n)
275,000 = 225,000(A/P IRR 10) + 500 * 35 + 21,000 - 75,000(A/F IRR 10)
275,000 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 500 * 35 +21,000 - 75,000[i/((1+i)^n-1)]
b) Same thing, just using 375.
375*550 = 225,000(A/P IRR n) + 375 * 35 + 21,000 - S(A/F IRR n)
187,500 = 225,000(A/P IRR 10) + 375 * 35 + 21,000 - 75,000(A/F IRR 10)
187,500 = 225,000 [i(1+i)^n/((1+i)^n-1)] + 375 * 35 +21,000 - 75,000[i/((1+i)^n-1)]
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