Your company is considering adding some processing equipment to the plant to aid in the removal of impurities from some raw materials. By adding the processing equipment, the firm can purchase lower-grade raw material at reduced cost and upgrade it for use in its products. Four different pieces of processing equipment with 20-year lives are being considered:
A B C D
Initial investment $11,000 $19,000 $25,000 $30,000
Annual savings in materials costs 4000 6000 7500 9000
Annual operating cost 1500 2500 2500 3500
The company can obtain a 15% annual return on its investment in other projects and is willing to invest money on the processing equipment only as long as it can obtain 15% annual return on each increment of money invested. Which one, if any, of the alternatives should be selected? Use a challenger-defender rate of return analysis.