Question

Question 3 (10 marks) a) Six mutually exclusive projects A-F are being considered by a company. They have been ordered by first costs so that project A has the lowest first cost, and F the highest. The table below provides information on the IRR and incremental IRR of each investment. For example, the IRR of C is 11 % ; the incremental IRR going from A to C is 13 % and the incremental IRR from B to C is 8%. Incremental IRR relative to investment: D E Project IRR on investment В A A 8% В 15% 11% 26% C 8% 12% 11% 13% 19% 15% 13% 12% 11% 15% 13% 12% -8 % 6% Е 8% 11% F 10% If all projects are mutually exclusive simple investments, which project would be chosen under each of t following circumstances (explain your reasoning): a) MARR 18 % b) MARR 10%

Answer 1

Equivalent annual cost for Cut'n Move=(50000-10000/1.1^6)*10%/(1-1/1.1^6)+8000=18184.295215

Equivalent annual cost for Rocks-B-Gone=(80000-15000/1.1^12)*10%/(1-1/1.1^12)+4000/1.1*(1-(1.06/1.1)^12)/(1-(1.06/1.1))*10%/(1-1/1.1^12)=16306.249226

Choose Rocks-B-Gone as it has lower equivalent annual cost