Answered: You are evaluating three equipment. The…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 6E

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Question

You are evaluating three equipment. The cash flows are shown below. A MARR of 3% was setup and your company wants to earn as much money as possible, if MARR is achieved.

	A	B	C
Year	Net CFBT	Net CFBT	Net CFBT
0	-97,500	-130,000	-170,000
1	22,750	31,200	32,500
2	-6000	-35,750	-16,000
3	29,250	40,300	26,000
4	32,500	44,850	35,100
5	35,750	55,400	52,000

Part a) Determine which alternative should be recommended by using incremental
rate of return (Δi*). Determine if do-nothing (DN) is an option and take it into consideration in your
analysis if needed. Make sure to justify your answer with both calculations and text.

Part b) You were holding discussions with the bank and you were able to secure a
reinvestment interest rate of 10% per year and the bank agreed to lend you money at 8% per year. With
this information in mind, you determined how the actual reinvestment rate and borrowing rate
affect the rate of return for the selected project from 2, part a). Use MIRR method to determine if the
alternative chosen from 2, part a) will make MARR based on the external rate of return that you
calculated. Make sure to show your work and justify your answer with both calculations and text.

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