The five alternatives shown here are being evaluated by the rate of return method

                        Initial                           ROR                            Incremental ROR

Alternative      Investment $,              versus DN, %              A     B       C      D       E                    

A                     -25,000                        9.6                               -   27.3   9.4   35.3   25.0

B                     -35,000                        15.1                             -     -      0      38.5   24.4

C                     -40,000                        13.4                             -     -      -      46.5   27.3

D                     -60,000                        25.4                             -     -      -       -        6.8

E                      -75,000                        20.2                                                                 -

(a) If the alternatives are mutually exclusive and the MARR is 26% per year, which alternative should be selected?

(b) If the alternatives are mutually exclusive and the MARR is 15% per year, which alternative should be selected?

(c ) If the alternatives are independent and the MARR is 15% per year, which alternative(s) should be selected?

1.

In planning a plant expansion, MedImmune has an economic decision to make-upgrade the existing controlled-environment rooms or purchase new ones.  The presently owned ones were purchased 4 years ago for $250,000.  They have a current "quick sale" value of $20,000, but for an investment of $100,000 now, they would be adequate for another 4 years, after which they would be sold for $40,000.  Alternatively, new controlled-environment rooms could be purchased at a cost of $270,000.  They are expected to have a 10-year life with a $50,000 salvage value at that time. Determine whether the company should upgrade or replace.  Use a MARR of 20% per year.

2.

ABB communications is considering replacing equipment that had a first cost of $300,000 five years ago.  The company CEO wants to know if the equipment should be replaced now or at any other time over the next 3years to minimize the cost of producing miniature background suppression sensors.  Since the present equipment or the proposed equipment can be used for any or all of the 3-year period, one of the company's industrial engineers produced AW cost information for the defender and challenger shown below.  The values represent the annual costs of the respective equipment if used for the indicated number of years.  Determine when the defender should be replaced to minimize the cost to ABB for the 3-year study period using an interest rate of 10% per year.

                                                            AW if kept stated

Number of                                           Number of years, $ per year

Years Kept                                          Defender                     Challenger

1                                                          -22,000                        -29,000

2                                                          -24,000                        -26,000

3                                                          -27,000                        -25,000

3.

An automobile company is investigating the advisability of converting a plant that manufactures economy cars into one that will make retro sports cars.  The initial cost for equipment conversion will be $200 million with a 20% salvage value anytime within a 5-year period.  The cost of producing a car will be $21,000, but is expected to have a selling price of $33,000 to dealers.  The production capacity of the first year will be 4000 units.  At an interest rate of 12% per year, by what uniform amount will production have to increase each year in order for the company to recover its investment in 3 years?

4.

ABB purchased fieldbus communication equipment for a project in South Africa for $3.15 million.  The net cash flow is estimated at $500,000 per year, and a salvage value of $400,000 is anticipated regardless of when it is sold.  Determine the number of years the equipment must be used to obtain payback at MARR values of (a) 0% and 8% per year and (b) 15% and 16% per year.  ( c ) use a spreadsheet to plot the payback years for all four return values.