Question
Mike Moore's microbrewery is considering production of a new ale called Mike's Honey Harvest Brew. To produce this new offering. Mike is considering two independent
Mike Moore's microbrewery is considering production of a new ale called Mike's Honey Harvest Brew. To produce this new offering. Mike is considering two independent projects. Each of these projects has two mutually exclusive alternatives, and each alternative has a useful life of 10 years no salvage value. Mike's MARR is 8%. Information regarding the projects and alternatives are given in the following tables.
Project/Alternatives | Cost | Annual Benefit |
Project 1 Purchase a new fermenting tank | ||
5000 gallon tank | $5000 | $1192 |
15,000 | $10,000 | $1992 |
Project 2 Purchase bottle filler and capper | ||
2500 bottle/hour machine | $15,000 | $3337 |
5000 bottle/hour machine | $25,000 | $4425 |
Using incremental rate of return analysis to complete the following worksheet.
Proj/Alt. | Cost, P | Annual Benefit, A | (A/P, I , 10) | IRR |
1A | $5,000 | $1192 | 0.2385 | 20% |
1B-1A | $5,000 | $800 | 0.1601 | |
2A | $15,000 | $3337 | ||
2B-2A | $10,000 |
Which project should be funded if only $15,000 is available.
The cutoff rate of return if only $15,000 is available.
Which project should be funded if $25,000 is available.
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