newnansm8 - Chapter 8: Incremental Analysis 8-1 At 10%,...

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Unformatted text preview: Chapter 8: Incremental Analysis 8-1 At 10%, select Edmonton. NPW-20000%-10000% 0% 10000% 20000% 30000% 40000% 50000% 60000% 70000% 1 3 5 7 9 11 13 15 17 19 21 rate $$ Rate Hfx Edm To Van Cal Reg 8-2 PW Chart $(800) $(600) $(400) $(200) $- $200 $400 $600 $800 $1,000 $1,200 $1,400 1% 3% 5% 7% 9% 11% 13% 15% 17% 19% Interest Rate NPV A B C D If MARR > 18% Choose If 18% >MARR> 9% Choose D If 9% >MARR> 0% Choose C 8-3 $(2,000) $(1,000) $- $1,000 $2,000 $3,000 $4,000 1 % 4 % 7 % 1 % 1 3 % 1 6 % 1 9 % A B C D E F If MARR > 18% Choose If 18% >MARR> 10% Choose D If 10% >MARR> 0% Choose F 8-4 $(500) $- $500 $1,000 $1,500 $2,000 1 % 3 % 5 % 7 % 9 % 1 1 % 1 3 % 1 5 % 1 7 % 1 9 % Keep 1 story 2 story 3 story 4 story 5 story If MARR > 15% Choose If 15% >MARR> 12% Choose 1 story If 12% >MARR> 8% Choose 3 story If 8% >MARR> 0% Choose 5 story 8-5 Plan Cost of Improvements and Land Net Annual Income Salvage Value Computed Rate of Return Decision A $145,000 $23,300 $70,000 15% Accept B $300,000 $44,300 $70,000 12.9% Accept C $100,000 $10,000 $70,000 9% Reject - fails to meet the 10% criterion D $200,000 $27,500 $70,000 12% Accept Rank the three remaining projects in order of cost and examine each separable increment of investment. Plan D rather than Plan A Investment Annual Income Salvage Value $55,000 $4,200 $0 $55,000 = $4,200 (P/A, i %, 15) (P/A, i%, 15) = $55,000/$4,200 = 13.1 From interest tables: i = 1.75% This is an unacceptable increment of investment. Reject D and retain A. Plan B rather than Plan A Investment Annual Income Salvage Value $155,000 $21,000 $0 $155,000 = $21,000 (P/A, i%, 15) (P/A, i%, 15) = $155,000/$21,000 = 7.38 From interest tables: i = 10.5% This is a desirable increment of investment. Reject A and accept B. Conclusion: Select Plan B. 8-6 Year Plan A Cash Flow Plan B Cash Flow Plan B Rather than Plan C Cash flow Plan C rather than Plan A Plan B-$10,000-$15,000-$5,000-$20,000-$5,0000 1-10 +$1,625 $1,625 $0 +$1,890 +$265 10-$10,000 $0 +$10,000 $0 $0 11-20 +$1,625 +$1,625 $0 +$1,890 +$265 Rate of Return 10%* 8.8% 7.2%** 7% 0.6%*** *The computation may be made for a 10-year period: $10,000 = $1,625 (P/A, i%, 10) i = 10% The second 10-year period has the same return. **The computation is: $5,000 = $10,000 (P/F, i%, 10) (P/F, i%, 10) = $5,000/$10,000 = 0.5 i = 7.2% ***The computation is: $5,000 = $265 (P/A, i%, 20) i = 0.6% The table above shows two different sets of computations. 1. The rate of return for each Plan is computed. Plan Rate of Return A 10% B 8.8% C 7% 2. Two incremental analyses are performed. Increment Rate of Return Plan B Plan A 7.2% A desirable increment. Reject Plan A. Retain Plan B. Plan C Plan B 0.6% An undesirable increment....
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newnansm8 - Chapter 8: Incremental Analysis 8-1 At 10%,...

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