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Question 6.NN: Use the ERR method incrementally to decide whether project A...

Use the ERR method incrementally to decide whether project A or B should be recommended. These are two mutually exclusive cost alternatives, and one of them must be selected. MARR=∈=10% per year. Assume repeatability is appropriate for this comparison. 

A

B

Capital investment

 $100,000 $5,000
Annual operating expense $5,000

$17,500

Useful life                  

 20 years 10 years
Market (salvage) value None

None
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$95,000(F/P, \acute{i}, 20) = $12,500(F/A, 10%, 20) + $5,000(F/P, 10%, 10)
\acute{i}  = 10.7% > MARR
Since the ERR of the incremental investment required for Alternative A is greater than the MARR, Alternative A is preferred.

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