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Green Lawn Care is analyzing the replacement of an aging compactor motor. The key parameters of the three motors under scrutiny (Small, Medium and Big)

Green Lawn Care is analyzing the replacement of an aging compactor motor. The key parameters of the three motors under scrutiny (Small, Medium and Big) are provided below.

Parameters

Small

Medium

Big

1. Initial Cost ($)

300,000

425,000

510,000

2. Revenues ($)

200,000 annually

200,000 at EOY1 increasing by 1% annually thereafter

290,000 at EOY1 decreasing by 1% annually thereafter

3. Operating Costs ($)

100,000 at EOY1 decreasing by $2,000 annually thereafter.

110,000 at EOY1 increasing by $500 annually thereafter.

165,000 at EOY1 increasing by $2,500 annually thereafter

4. End-of-life salvage value ($)

10,000

-5,000

30,000

5. Useful life (years)

5

10

10

  • EOY = End-of-year

  • Industry Standard = 4 years

  • MARR = 10%

  1. Mediums External Rate of Return (ERR) (second decimal; no rounding) is a) 10.98%; b) 11.30%; c) 13.60%; d) 14.37%.

  2. Bigs External Rate of Return (ERR) (second decimal; no rounding) is a) 10.15%; b) 11.30%; c) 12.46%; d) 12.83%.

  3. The incremental External Rate of Return (ERR) between Small and Big (second decimal; no rounding) is a) 9.00%; b) 9.38%; c) 10.16%; d) 10.32%.

  4. The incremental External Rate of Return (ERR) between Medium and Big (second decimal; no rounding) is a) 8.40%; b) 8.76%; c) 9.18%; d) 10.06%.

  5. The best (valid) motor based on the External Rate of Return (ERR) method (use as many decimals as required) is a) Small; b) Medium; c) Big.

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