Question

A firm is considering three mutually exclusive alternatives as part of an upgrade to an existing transportation network. At EOY 10, alternative III would be replaced with another alternative Ill having the same installed cost and net annual revenues. If MARR is 10% per year, which alternative (if any) should be chosen? Use the incremental IRR procedure. $40,000 $6,500 $20,000 $5,200 Installed cost Net annual revenue Salvage value Useful life Calculated IRR $30,000 $5,600 0 20 years 18.0% 20 years 15.3% 10 years 22.6% O A. Alternative III OB. Alternative O C. Alternative II Find the IRR of the difference between the base alternative and the second-choice alternative. IRRA (T -0 -%. (Round to one decimal place.) Find the IRR of the difference between the current base alternative and the third-choice alternative. IRRA V-V)=%. (Round to one decimal place.) Which alternative should be chosen? Choose the correct answer below.

Answer 1

The IRR of the difference between the base alternative and second alternative

IRR (Alternative III - Alternative II)= 4.6 %

The IRR of the difference between the base alternative and third alternative

IRR (Alternative III - Alternative I) = 7.3 %

The best alternative for the company will be Alternative I because it will give highest net present value.