Question

Question 21 8 pts XYZ, Inc, is considering investing in one of the following alternatives. The alternatives are mutually exclusive and each has a 10 year useful life. If XYZ, Inc. requires at least 7% return on their investments, which alternative should be selected? (hint use the incremental analysis method). First cost $1,991 $2,181 $1,255 Annual benefit 325 363 225 Computed rate of return 10.1% 10.5% 12.3% 12pt Paragraph BIVAT app.honorlock.com 停止共享 15:23

Answer 1

Alternative C has the lowest initial cost therefore considered it has the base selection. Alternative a A has second lowest cost therefore consider it as Challenger to alternative C.

Calculate the incremental cash flow by subtracting the cash flow of alternative C from the cash flow of alternative A.

A с year 0 -1991 -1255 1 325 225 2 325 225 A(A-C) -736 100 100 100 100 100 100 3 325 225 4 325 225 5 325 225 6 325 225 7 325 225 100 8 325 100 9 325 100 225 225 225 12.3% 10 325 100 16.0% IRR 10.1%

The incremental rate of return is 6% that is less than MARR. Hence, select alternative C over alternative A.

Reject A.

Now,compare alternative C with alternative B

fx =IRR( GB4:GB14 ) FY FZ GA GB GC GD 2 = 3 B. С year 0 4 -2181 A(B-C) -926 138 138 5 363 -1255 225 225 1 2 6 7 3 225 138 8 4 225 138 9 5 225 138 10 363 363 363 363 363 363 363 363 363 225 6 7 138 11 225 138 12 225 138 8 9 13 225 138 14 225 138 10 IRR 15 10.5% 12.3% 8.0%

The incremental IRR is greater than MARR therefore, select alternative B.

I have solved it using excel also shown the formula. Now solving it manually.

$\large NPW = - 926 + 138(P/A,i\%,10)$

When we discount the cash flow at IRR the NPW is zero. Assume rate = 8%

$\large NPW = - 926 + 138(P/A,8\%,10)$

$\large \implies NPW = - 926 + 138\times 6.7100$

$\large \implies NPW = - 0.02$

Or , we can say at a rate of 8% the NPW is approximately equal to zero.

∆IRR(B - C) = 8%

Select B.