W3_Reginald Nwachukwu_Engineers' Desicion Making Tools

1. Problem Definition or Opportunity Statement:

" Evaluation of repayment options for a new concrete mixer"

GEMP Engineering Ltd is desirous to purchase a new self loading concrete mixer online from IronPlanet.com The initial cost and the estimated cash inflow from the concrete mixer is as shown below. The concrete mixers have a useful life of 5 years each with no salvage value.
Management has requested that economic analysis of the various options be performed for immediate investment or purchase of anew concrete mixer.

The informations available are: 1.0 Fixed cost = $25,850 2.0 MAAR      2.1 Cost of borrowing money, loan A = 9%      2.2 Investment opportunity , Alternative B = 10%      2.3 Cost of capital = 11% The Minimum Attractive Rate of Return - MARR is equal to or greater than the highest value of 1, 2 and 3. Therefore, MARR = 11%

2. Development of Feasible Alternatives:

The alternatives to be considered are to purchase either of the concrete mixers Type "A" or Type "B":

1. Concrete mixer Type "A"

2. Concrete mixer Type "B"

Figure 1 Concrete mixer Type A & B

3. Development of Outcome of Each Alternative:

The outcome for each alternative or concrete mixer is to select the 'best'alternative with higher NPV, higher  IRR and higher ARR. 

4. Selection of Acceptable Criteria:

The NPV, IRR , ARR and MARR are the criteria used to select the 'beat' alternative.

5. Analysis And Comparison of Outcome From Each Alternative:

Table 1 Calculations of cash inflow

Table 2 Calculation of NPV for Alternative A & B

Table 3 Benefit - Cost Ratio Analysis

Figure 2 Calculation of IRR for Alternative A & B

Figure 3 Calculations of ARR for Alternative A & B

6. Selection of the Preferred Alternative:

Alternative 'B' is the preferred option since its has a higher NPV and lower IRR and higher ARR

Table 6 Comparism of Decision Making Tools

7. Performance Reporting And Evaluation of Results:

The concrete mixer will be monitored using the IRR & NPV after its has been bought to measure its return on investments.

References:

1. Sullivan William, Wicks M. Elin & Keolling C. Pactricks (2009) Engineering Economy Fourteenth Edition Pearson International Edition

2. Tom Arnold & Richard L. Shockley (2002)  Real Option Analysis and the Assumptions of NPV Rule1  11 Retrieved from

 http://www.realoptions.org/papers2002/SchockleyOptionNPV.pdf

3. Sascha Rudolf The Net Present Value in Comparison to the Payback and Internal Rate of return Methods (2008) 2 Retrieved from 

http://university.akelius.de/library/pdf/the_net_present_sascha_rudolf.pdf