A plastics company is considering two (mutually exclusive) injection molding processes. Process X will have a first cost of $600,000, annual costs of $200,000, and a salvage value of $100,000 after 5 years. Process Y will have a first cost of $800,000, annual costs of $150,000, and a salvage value of $230,000 after 5 years. Based on the information provided, answer the following questions;
(a) Prepare “Incremental Cash Flow Tabulation” showing the cash flows for Process X, the cash flows for Process Y, and the incremental cash flow (see Table 8-1). Then, write the rate of return equation that can be used to correctly solve for the incremental rate of return.
(b) What is the rate of return on the increment of investment between the two alternatives? (Solve using trial and error or spreadsheet). Which process should the company select on the basis of a rate of return analysis, if the MARR is 20% per year? Why?