Question: The Company is considering adding processing equipment to aid in the removal of impurities from some raw materials. Four pieces of processing equipment are being
The Company is considering adding processing equipment to aid in the removal of impurities from some raw materials. Four pieces of processing equipment are being considered. The company can obtain a 25% annual return on its investment in other projects and is willing to invest money in the processing equipment only as long as it can obtain 25% annual return on each increment of money invested. Which one, if any, of the alternatives should be selected? Use the challenger-defender rate of return analysis assuming perpetual or indefinite life.
(I am mostly confused on how to do this with the perpetual or indefinite life; I would know how to do it if the life of the machine was given.???) Thanks!
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| Machine A | Machine B | Machine C | Machine D |
| Initial Investment | $ 11,500 | $ 15,500 | $ 20,500 | $ 35,000 |
| Annual Savings in Material Costs | $ 5,000 | $ 6,250 | $ 9,600 | $ 13,000 |
| Annual Operating Costs | $ 2,000 | $ 2,000 | $ 4,000 | $ 5,000 |
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