The Engineering Economics class at Stevens requires a solution to allow students to show their working on assessments. This will serve as a temporary solution while they wait for in-person assessment to resume. In person assessments are not expected to resume for another 3 years. Students in the class have been presented with two temporary options. For the first option, students will be given personal Ipads which they can use to electronically capture and upload their assessment solutions to Canvas. This option will cost $40,000 to purchase, with an annual Apple Care (warranty) cost of $25,000. This option will result in an annual savings of $35,000 because fewer graders will be needed, and will have a salvage value of $30,000. The second option is a futuristic mind reader machine which will automatically read each students mind, and upload their thought process directly to Canvas for grading. This system will surprisingly only cost Stevens $80,000, will have annual expenses of $35,000, annual savings of $60,000 and a salvage value of $60,000. Both options will be MACRS depreciated.

Using IRR analysis, calculate the incremental IRR given a 40% tax rate and an 18% MARR.

Note: The table below provides some guidance on how to setup and solve this problem in Excel. The values provided in the table below are accurate, and should be used to solve the problem.

Hint: Capital gain can be a negative number (representing a loss).

Question:

Enter the calculated incremental IRR below. Do not include the "%" sign.

Tax Rate MARR Expenses Deprec. Rate Depreciation Capital gains Taxable income Taxes Option 1: Provide Ipads Year Gross income 0 1 2 3 Capital Salvage Net cash flow -40000 0.0375 0.0722 0.0668 Book value Option 2: Mind Reader Gross income Expenses Deprec. Rate Depreciation Capital gains Taxable income Taxes Capital Salvage Net cash flow -80000 Year 0 1 2 3 0.0375 0.0722 0.0668 Book value Option ?? Incremental Cash Flow Net cash flow calculations Year Option? 0 1 2 3 Select? Which option should you chose? Internal rate of return Tax Rate MARR Expenses Deprec. Rate Depreciation Capital gains Taxable income Taxes Option 1: Provide Ipads Year Gross income 0 1 2 3 Capital Salvage Net cash flow -40000 0.0375 0.0722 0.0668 Book value Option 2: Mind Reader Gross income Expenses Deprec. Rate Depreciation Capital gains Taxable income Taxes Capital Salvage Net cash flow -80000 Year 0 1 2 3 0.0375 0.0722 0.0668 Book value Option ?? Incremental Cash Flow Net cash flow calculations Year Option? 0 1 2 3 Select? Which option should you chose? Internal rate of return