Question 9.3: The BK Company is considering five proposals for new equipme......
The BK Company is considering five proposals for new equipment, as indicated in Table 9-2. Each piece of equipment has a life of 100 years. Treating that period as infinite, the ROR will be the interest rate at which I is the capitalized equivalent of the perpetual series of payments R; hence, (7.8) CE\ =\ \frac{A}{i} gives the third row of Table 9-2. The BK Company has established a MARR of 11% and has a budget of $325 000. Which proposal(s) should the company select?
| Table 9-2 | |||||
| Proposal 1 | Proposal 2 | Proposal 3 | Proposal 4 | Proposal 5 | |
| Annual Revenue, R | $5 000 | $6000 | $25000 | $16000 | $20 000 |
| Investment, I | $60 000 | $50 000 | $100 000 | $100 000 | $100 000 |
| i* ≈ R/I | 8\frac{1}{3}% | 12% | 25% | 16% | 20% |
Using the selection algorithm, we obtain the following list:
\begin{array}{c c c}& i^* & \text{Investment}\\\text{Proposal}\ 3 & 25\% & \$100\ 000 \\\text{Proposal}\ 5 & 20\% & \$100\ 000 \\\text{Proposal}\ 4 & 16\% & 100\ 000 \\\hdashline \text{Proposal}\ 2 & 12\% & 50\ 000 \\\hdashline \text{Proposal}\ 1 & 8\frac{1}{3}\% & 60\ 000\end{array}\begin{array}{c}\\\\\\\\ \text{Budget}\ \text{cut-of} \\ \text{MARR}\ \text{cut-of} \\\\\end{array}
Proposal 2 is acceptable from the standpoint of the MARR criterion, but insufficient funds are available to include it. Thus, proposals 3, 5, and 4 are selected, and $25 000 is left unspent from the $325 000 budget.