Capital Budgeting
Mike Moore's microbrewery is considering production of a new ale called Mike's Honey Harvest Brew. To introduce 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 and no salvage value. Mike's MARR is 8%. Information regarding the projects and alternatives are given in the following table.
|
Project/Alternative
|
Cost
|
Annual Benefit
|
|
Project 1: Purchase New Fermenting Tanks
|
|
|
|
Alt. A: 5000-gallon tank
|
$5000
|
$1192
|
|
Alt. B: 15000-gallon tank
|
$10000
|
$1992
|
|
Project 2: Purchase Bottle-Filler & Capper
|
|
|
|
Alt. A: 2500-bottle/hour machine
|
$15000
|
$3337
|
|
Alt. B: 500-bottle/hour machine
|
$25000
|
$4425
|
Use incremental rate of return analysis to complete the following worksheet.
|
Proj./Alt.
|
Cost, P
|
Annual Benefit, A
|
(A/P, i, 10)
|
IRR
|
|
1A
|
$5000
|
$1192
|
0.2385
|
20%
|
|
1B-1A
|
$5000
|
$800
|
0.1601
|
|
|
2A
|
$15000
|
$3337
|
|
|
|
2B-2A
|
$10000
|
|
|
|
Use this information to determine:
(a) Which projects should be funded if only $15,000 is available
(b) The cutoff rate of return if only $15,000 is available
(c) Which projects should be funded if $25,000 is available