An Insulated Shipping Container Supplier Is Considering Expanding Its Product

question 18

Essay

An insulated shipping container supplier is considering expanding its product line. Three materials with different insulation properties are under consideration. The following information is prepared for the economic evaluation of the best material. If the company's MARR is 4% per year and the study period is 5 years, use an AW- based incremental rate
of return equation to determine which alternative is preferred. Assume the salvage value is negligible. $$\begin{array} { | l | l | l | l | } \hline \text { Material } & Q & R & S \\\hline \text { First costs } & \$ 46,000 & \$ 58,000 & \$ 61,000 \\\hline \text { Net annual revenue } & \begin{array} { l } \$ 10,000 \text { in year } 1 , \\\text { increasing by } \\\$ 100 \text { per year } \\\text { thereafter }\end{array} & \begin{array} { l } \$ 11,900 , \\\text { increasing by } \\\$ 450 \text { per year } \\\text { thereafter }\end{array} & \$ 13,450 \\\hline \text { IRR (\%) } & 5.93 & 5.15 & 5.14\\\hline \text { Incremental IRR (\%) } & & & \\\hline Q & - & & \\\hline \text { R } & 2.50 \% & - & \\\hline S & 2.79 \% & 5.09 \% & -\\\hline\end{array}$$

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Definitions:

Simple Linear Regression

A statistical method for estimating the relationship between two quantitative variables, allowing predictions of one variable given the other.

True Correlation

The actual degree of a linear relationship between two variables, excluding any error or distortion.

Linear Relationship

A type of correlation where there is a constant change rate between two variables, indicative of a straight line when graphed.

Confidence Interval Estimate

A range of values, derived from sample statistics, that is likely to contain the value of an unknown population parameter.