Question

One of the mutually exclusive alternatives below must be selected. Base your recommendation on A(Sauer-Glock) cash flows when the MARR = 8% per year. EOY EOY P/4 | 10 20 0 0 10 Glock 40 Sauer 45 The IRR on A(Sauer-Glock) is % (Round to two decimal places.)

Answer 1

Incremental initial cost (Saucer - Glock) = 2P - P = P

Incremental cash flow at EOY 10 (Saucer - Glock) = 0 - (-3P) = 3P

Incremental cash flow at EOY 20 (Saucer - Glock) = 0.25 P - 0 = 0.25P

LEt incremental IRR be i%, then

3P *(P/F,i%,10) + 0.25P*(P/F, I%,20) = P

Dividing by P

3 *(P/F,i%,10) + 0.25*(P/F, I%,20) = 1

using trail and error method,

When I = 11%, value of 3 *(P/F,i%,10) + 0.25*(P/F, I%,20) = 3 * 0.352184 + 0.25 * 0.124034 = 1.08756

When I = 12%, value of 3 *(P/F,i%,10) + 0.25*(P/F, I%,20) = 3 * 0.32197 + 0.25 * 0.103667 = 0.99184

using interpolation

I = 11% + (1.08756 - 1) /(1.08756 - 0.99184) *(12%-11%)

I = 11% + 0.914%

I = 11.91%

As the incremental IRR > MARR (8%), Saucer 45 should be selected