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The Smooth Paving Company must purchase a compactor to meet the growing demands for road construction and resurfacing. The key parameters of the three compactors
The Smooth Paving Company must purchase a compactor to meet the growing demands for road construction and resurfacing. The key parameters of the three compactors under scrutiny are provided below. Parameters 1. Initial Cost ($) 2. Revenues ($) Alpha Beta Gamma 120,000 180,000 225,000 $140,000 at EOY1 increasing by $5,000 annually to $146,100 at $250,000 at EOY3 EOY1 EOY1 (=$150,000); increasing by increasing by thereafter 1% annually to 1% annually to decreasing by EOY10 EOY5 $20,000 annually to EOY5 (=$110,000) $97,000 at EOY1 117,000 at $173,000 at EOY1 decreasing EOY1 annually by $500 decreasing by increasing by to EOY5 1% annually to 3% annually to EOY10 EOY5 5,000 0 ($20,000) 5 years 10 years 5 years All parameter values are fictitious. EOY = End-of-year Industry Standard = 2.5 years MARR = 10% ($) = Negative dollar amount 3. Operating Costs ($) 4. End-of-life salvage value ($) 5. Useful life (years) . . . . 17. Beta's Internal Rate of Return (IRR). 18. Gamma's IRR. 19. The incremental Internal Rate of Return (AIRR) between the Alpha and the Beta compactors (using Excel's IRR function). 20. The incremental Internal Rate of Return (AIRR) between the Alpha and the Gamma compactors (using Excel's IRR function). 21. Two-part question: i) Based on the incremental IRR decision criterion (using Excel's IRR function or equivalent), is the Beta compactor better than the Gamma compactor? ii) Does your answer to part i) of this question coincide with your conclusion as to the better of the Beta and Gamma compactors based on the AEW decision criterion? Answer options are a) Yes, Yes; b) Yes, No; c) No, Yes; d) No, No
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