Question

A process control manager is considering two robots to improve materials-handling capacity in the production of rigid shaft couplings that make dissimilar drive components. Robot X has a first cost of $84,000, an annual M&O cost of $31,000, and $40,000 salvage value, and it will improve revenues by 596,000 per year. Robot Y has a first cost of $146.000, an annual M&O cost of $28.000. and $47000 salvage value, and it will increase revenues by $125,000 per year. The company's MARR is 25% per year, and it uses a 3-year study period for economic evaluations Calculate the incremental ROR, and identify the robot the manager should select The incremental ROR is % The manager should select robot (Click to select)

Answer 1

YEARS	ROBOT X	ROBOT Y	INCREMENTAL RATE OF RETURN
0	-84000	-146000	62000
1	65000(96k-31k)	97000(125k-28k)	-32000
2	65000	97000	-32000
3	1,05,000(65k+40k)	1,44,000(97k+47k)	2%
IRR formula from excel	35%	21%

The incremental ROR is 2%. Therefore, from the above calculation it can be deduced that the manager should select robot X as it gives more than their Minimum Accepted Rate of Return of 25%.