Engineering Economic Analysis

268 INCREMENTALANALYSIS

selling below their stated value (in other words, junk
bonds), Both bonds are rated as equally risky. Which,
if any, of the bonds should you buy if your MARR
is 25%?
Annual Current Market
Stated Interest Price, Including Bond
Bond Value Payment Buying Commission Maturity.
Gen Dev $1000
RJR 1000

$ 94

140

$480

630

15 years

15

*At maturity the bondholder receives the last interest pay-
ment plus the bond stated value.

8-25 Three mutually exclusive alternatives are being
considered.

Initial investment

Annual net income

Computed rate

of return

A

$50,000

5,093

8%

B

$22,000

2,077

7%

C

$15,000

1,643

9%

Each alternative has a 20-year useful life with no

salvage value. If the minimum attractive rate of re-

turn is 7%, which alternative should be selected?

8-26 A firm is considering the following alternatives, as

well as a fifth choice: do nothing.

8-27

Each alternative has a 5-year useful life. The firm's

minimqm attractive rate of return is 8%. Which

alternative should be selected?

Alternatives

8-28 Our cat Fred's summer kitty-cottage needs a new

roof. He's considering the following two proposals

and feels a 15-year analysis period is in line with his

remaining lives. Which roof should he choose if his

MARR is 12%? What is the actual value of the IRR

on the incremental cost? (There is no salvage value

for old roofs.)

First cost

Annual upkeep

Service life, in years

Thatch

$20

5

3

Slate

$40

2

5

8-29 Don Garlits is a landscaper. He is considering the

purchase of a new commercial lawn mower, either,

the Atlas or the Zippy. The minimum attractive rate

of return is 8%, and the table provides all the neces-

sary information for the two machines.

(a)Determine the rate of return on the Atlas mower

(to the nearest 1%).

(b)Does the rate ofreturn on the Zippy mower ex-

ceed the MARR?

(c) Use incremental rate of return analysis to decide

which machine to purchase.

8-30 QZY, Inc. is evaluating new widget machines offered

by three companies. The machines have the following

characteristics:.

MARR=15%. Using rate of return analysis, from

which company, if any, should you purchase the

widget machine?

r

1 2 3 4

Initial cost $100,000 $130,000 $200,000 $330,000

Uniform annual 26.38 38.78 47.48 91.55

net income ($1000s)

Computed rate 10% 15% 6% 12%

of return

A B C D

Initial cost $2000 5000 4000 3000

Annual benefit 800 500 400 1300

Salvage value^2000150014003000

Life, in years^5674

MARR required 6% 6% 6% 6%

Find the best alternative using incremental IRR

analysis.

Atlas Zippy

Initial cost $6700 $16,900

Annual operation and^1500 1,200

maintenance cost

Annual benefit^4000 4,500

Salvage value^1000. 3,500

U sefullife, in years^36

Company Company Company

A B C

First cost $15,000 $25,000 $20,000

Maintenance 1,600^400900

and operating

Annual benefit 8,000 13,000 9,000

Salvage value 3,000 6,000 4,500

U sefullife,^444

in years