A firm is considering which of two devices to install to reduce costs. Both devices have useful lives of 5 years and no salvage value. Device A costs $10,000 and can be expected to result in $3,000 savings annually. Device B costs $13,500 and will provide cost savings of $3,000 the first year but will increase $500 annually, making the second-year savings $3,500, the third-year savings $4,000, and so forth. For a 7% MARR, which device should the firm purchase? Year 0 1 2 3 4 5 Device A -$10,000 3000 3000 3000 3000 3000 Device B -$13,500 3000 3500 4000 4500 5000 Based on the proper analysis (incremental rate of return), which alternative should you choose? 4
A firm is considering which of two devices to install to reduce costs. Both devices have useful lives of 5 years and no salvage value. Device A costs $10,000 and can be expected to result in $3,000 savings annually. Device B costs $13,500 and will provide cost savings of $3,000 the first year but will increase $500 annually, making the second-year savings $3,500, the third-year savings $4,000, and so forth. For a 7% MARR, which device should the firm purchase? Year 0 1 2 3 4 5 Device A -$10,000 3000 3000 3000 3000 3000 Device B -$13,500 3000 3500 4000 4500 5000 Based on the proper analysis (incremental rate of return), which alternative should you choose? 4
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:QUESTION 8
A firm is considering which of two devices to install to reduce costs. Both devices have useful lives of 5 years and no
salvage value. Device A costs $10,000 and can be expected to result in $3,000 savings annually. Device B
costs $13,500 and will provide cost savings of $3,000 the first year but will increase $500 annually, making the second-year
savings $3,500, the third-year savings $4,000, and so forth. For a 7% MARR, which device should the firm purchase?
Year
0
1
2
3
4
5
Device A
-$10,000
3000
3000
3000
3000
3000
Device B
-$13,500
3000
3500
4000
4500
5000
Based on the proper analysis (incremental rate of return), which alternative should you choose?
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