Question

Polytec Chemical, Inc. must decide between two additives to improve the dry-weather stability of its low-cost acrylic paint. Additive A will have an equipment and installation cost of $144,000 and an annual cost of $55,000. Additive B will have an installation cost of $175,000 and an annual cost of $34,000. If the company uses a five-year recovery period for paint products and an MARR of 21% per year, which process is favored on the basis of an incremental rate of return analysis? Also, determine the value of Art The value of Aris On the basis of an incremental rate of return analysis, process (Click to select) is favored.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C D Year 0 1 2 Cash Flow Additive A Additive B $144,000 $175,000 $55,000 $34,000 $55,000 $34,000 $55,000 $34,000 $55,000 $34,000 $55,000 $34,000 Incremental Cash Flow -$31,000 $21,000 $21,000 $21,000 $21,000 $21,000 4. 5 MARR 21% Incremental IRR (41) 61.59% Favored Process Additive-B Rule of Incremental IRR: If Incremental IRR is greater than MARR then alternative with higher intial cost is selected. In above case incremental irr is more than marr thus, Additive-B is favored.

Cell reference -

ДА В D Year Cash Flow Additive A 144000 55000 55000 55000 55000 55000 2 ū sazovou Awn- Additive B Incremental Cash Flow 175000 =C4-D4 34000 =C5-D5 34000 =C6-D6 34000 =C7-D7 34000 =C8-08 34000 =C9-09 5 MARR 0.21 Incremental IRR (Ai) =IRR(E4:E9) 14 15 Favored Process Additive-B Rule of Incremental IRR: If Incremental IRR is greater than MARR then alternative with higher intial cost is selected. In above case incremental irr is more than marr thus, Additive-B is favored.

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