A company is considering some new testing equipment, and can choose between three mutually exclusive alternatives. The first alternative has a first cost of $5000, a uniform annual benefit of $1500, a salvage value of $700, and a life of 8 years. The second has a first cost of $3500, a benefit of $900 the first year, and increasing by $200 per year thereafter. Its salvage value is $500, and has an estimated life of 6 years. The third alternative has a first cost of $8000, a benefit of $1500 the first year, and increasing by 2% each year thereafter. Its salvage value is $1000 and it’s estimated to have a 12-year life.
a. Use incremental rate of return analysis to determine which alternative is best if the company’s MARR is 7%. Show all work.
b. Plot the results on a graph for values of i from 0 – 50%, and construct a choice table. Assuming a MARR of 7%, which alternative would you recommend?
c. Are the results from part “a” and “b” consistent? Briefly discuss.