Question

Question 3 (1 point) Saved You were given three cost-reduction proposals in your lower tier textile operation AO denotes the do-nothing alternative. The required investments are $320.000 for A1. $550,000 for A2, and $820,000 for A3. If the MARR is 15%, what system should be selected? You already estimated rates of return for the three projects, along with some incremental rates of return: Incremental Rate of Return (%) 18% 20 Incremental Investment A - Ao A₂ - Ao Az - Ao Az - A Az - A A3-A₂ 25 18 ca) Can't be determined

Answer 1

First we look at the Incermental IRR of each of the projects when compared with "Do nothing" option i.e. A1-A0, A2-A0, A3-A0

We find that incremental IRR is higher than MARR in each case, It means that every project is better than "Doing Nothing"

Now we look at incremental IRR between least costly alternative i.e. A1 and alternative with next higher cost i.e. Alternative A2. So, check the incremental IRR for A2-A1. It is 10%. We observe that it is lower than MARR. So, its not worth to invest extra amount in alternative A2.

Now look at incremental IRR between alternative A1 and alternative A3. Check for incremental IRR for A3-A1. It is 18% which is higher than MARR. So, it is worth to invest extra amount in alternative A3.

So, A3 should be the choice.