Problem 1

A small manufacturing company is considering the addition of one product line (Mutually Exclusive alternatives). If the total amount of investment capital available for any of the product line of choice is shown on the table below, which one should the company undertake on the basis of rate of return? Assume the company uses a 5-year project recovery period and a MARR of 20% per year. All cash flow estimates are in $1000 units.

The rate of return must be determine using trial and error method

	Product Lines
	T3	S2	U4	R1
First cost, $	-500	-400	-700	-200
M&O cost, $/year	-400	-300	-400	-200
Revenue, $/year	630	485	699	320

NB: The incremental rate of return i* must be determine using trial and error method.

(Please show the formulas used and all of the steps and draw out the cash flow diagram instead of using Excel functions or using a table.)