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9. (10 marks) A firm is considering the purchase of a new machine to increase the productivity of existing production process. All the alternatives have

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9. (10 marks) A firm is considering the purchase of a new machine to increase the productivity of existing production process. All the alternatives have a life of 10 years and they have negligible market value after 10 years. Use the IRR method (incrementally) to make your recommendation. The firm's MARR is 10% per year. Alternative Capital Investment Annual Operating Cost $100,000 $20,000 $110,000 $18,500 $125,000 $17,000 $130,000 $15,500 $150,000 $10,000 k=0 Internal Rate of Return (IRR) method Formally, (using the PW formulation), IRR is the i'% such that: R. (P/F,8%,k)=E (P/F,1%,K) Rx : revenues (receipts)for year k Ex : expenses for year k N : project life (orstudy period) Alternatively, PW=[R (P/F,8%,k)E,(P/F,1%,k)]=0 k=0

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