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Assignment 7 ROR Multiple Alternative

- The document is an assignment analyzing which type of roller (chemically treated vinyl or fiber-impregnated rubber) a company should select based on rate of return. - It provides cash flows for each alternative over 6 years and calculates the incremental cash flows. - Using the rate of return method, it determines that the internal rate of return for alternative B is 45.5504%, which is greater than the minimum acceptable rate of return of 21%. Therefore, alternative B should be selected.

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KHANSA DIVA NUR APRILIA
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195 views5 pages

Assignment 7 ROR Multiple Alternative

- The document is an assignment analyzing which type of roller (chemically treated vinyl or fiber-impregnated rubber) a company should select based on rate of return. - It provides cash flows for each alternative over 6 years and calculates the incremental cash flows. - Using the rate of return method, it determines that the internal rate of return for alternative B is 45.5504%, which is greater than the minimum acceptable rate of return of 21%. Therefore, alternative B should be selected.

Uploaded by

KHANSA DIVA NUR APRILIA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Nama : Khansa Diva Nur Aprilia

NIM : 19522332
Kelas : A (Senin, 09:30-12:00)

Assignment 7 ROR Multiple Alternative

Konica Minolta plans to sell a copier that prints documents on both sides simultaneously, cutting
in half the time it takes to complete big commercial jobs. The costs associated with producing
chemically treated vinyl rollers and fiber-impregnated rubber rollers are shown below. Determine
which of the two types should be selected by calculating the rate of return on the incremental
investment. Assume the company’s MARR is 21% per year.

Answer :
PA = $-50,000
PB = $-95,000
AA = $-100,000
AB = $-85,000
Salvage value (A) = $5,000
Salvage value (B) = $11,000
nA = 3
nB = 6
MARR = 21% per year
The LCM of 3 and 6 is 6. So, the cash flows for the LCM of 6 years are tabulated with the
incremental cash flow (calculation with excel):
Incremental Cash
Year Cash Flow A Cash Flow B
Flow
first
cost 0 $ -50,000.00 $ -95,000.00 $ -45,000.00
annual
cost 1 $ -100,000.00 $ -85,000.00 $ 15,000.00
annual
cost 2 $ -100,000.00 $ -85,000.00 $ 15,000.00
annual
cost 3 $ -100,000.00 $ -85,000.00 $ 15,000.00
3 $ 5,000.00 $ - $ 45,000.00
3 $ -50,000.00 $ -
annual
cost 4 $ -100,000.00 $ -85,000.00 $ 15,000.00
annual
cost 5 $ -100,000.00 $ -85,000.00 $ 15,000.00
annual
cost 6 $ -100,000.00 $ -85,000.00 $ 15,000.00
salvage
value 6 $ 5,000.00 $ 11,000.00 $ 6,000.00
$ -690,000.00 $ -594,000.00 $ 96,000.00
Incremental Cash Flow :
𝑛=6
A = $15,000

$45,000 $45,000 (P/F, 21%, 3)

$6,000 $6,000 (P/F, 21%, 6)


$15,000 (P/A, 21%, 6)
A A A A A A

0 1 2 3 4 5 6

$45,000

The rate of return equation based on the present worth of incremental cash flow is :
Inflow = Outflow
Inflow – Outflow = 0
-$45,000 + $15,000 (P/A, i*, 6) + $45,000 (P/F, i*, 3) + $6,000 (P/F, i*, 6) = 0

Trial and error using interest value 40% and 50% (because IRR with excel is 42%):
 For i* = 40%
-$45,000 + $15,000 (P/A, 40%, 6) + $45,000 (P/F, 40%, 3) + $6,000 (P/F, 40%, 6) = 0
-$45,000 + $15,000 (2.1680) + $45,000 (0.3644) + $6,000 (0.1328) = 0
-$45,000 + $32,520 + $16,398 + $796.8 = 0
$4,714.8 > 0
 For i* = 50%
-$45,000 + $15,000 (P/A, 50%, 6) + $45,000 (P/F, 50%, 3) + $6,000 (P/F, 50%, 6) = 0
-$45,000 + $15,000 (1.824) + $45,000 (0.2963) + $6,000 (0.0878) = 0
-$45,000 + $27,360 + $13,333.5 + $526.8 = 0
-$3,779.7 < 0

Use the interpolation formulas between 20% and 25%:

Y1 40%
Y i*
Y2 50%

X1 $4714,8
X 0
X2 -$3,779.7

𝑌−𝑌1 𝑋−𝑋1
= 𝑋2−𝑋1
𝑌2−𝑌1
𝑖∗−40% 0−$4,714.8
= −$3,779.7−$4,714.8
50%−40%
𝑖∗−40% −$4,714.8
= −$8,494.5
10%
−$4,714.8
𝑖 ∗ −40% = −$8,494.5 (10%)

𝑖 ∗ −40% = $0.555041497(10%)
𝑖 ∗ −40% = 5,5504%
𝑖 ∗= 5,5504% + 40%
𝑖 ∗= 45,5504%

Result:
Value of ROR is greater than MARR (45,5504% > 21%). So, alternative to be chosen is that
alternative B (impregnated) because the first costs are higher than the alternative A.

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