Solution 6.41
(a) Initial cost P1, Machine 1: -60,000 - (P1) = -16,000; P1 = $-44,000
Overall ROR, Machine 2: 0 = -60,000 + 16,000(P/A,i*,10); i* = 23.41%
Incremental investment, 3 to 2: -72,000 - (-60,000) = -$12,000
Incremental cash flow: 4 to 3: 24,000 – 19,000 = $5000
Incremental ROR 3 to 2: 0 -12,000 + 3000(P/A, ∆i*,10); ∆i* = 21.41%
Incremental ROR 4 to 3: 0 = -26,000 + 5000(P/A, ∆i*,10); ∆i*= 14.08%
(b) Machines are ranked according to initial investment: 1, 2, 3, 4; MARR = 18%
Compare 1 to DN: ∆i* = 18.6% > MARR eliminate DN
Compare 2 to 1: ∆i* = 35.7% > MARR eliminate 1
Compare 3 to 2: ∆i* = 21.41% > MARR eliminate 2
Compare 4 to 3: ∆i* = 14.08% < MARR eliminate 4:
select Machine 3