Question

Four mutually exclusive projects are being considered for a new two-mile jogging track. The life of the track is expected to be 80 years, and the sponsoring agency's MARR is 12% per year. Annual benefits to the public have been estimated by an advisory committee and are shown below. Use the IRR method (incrementally) to select the best jogging track. (6.4) А B с D Alternative Initial cost Annual benefits Rate of return on investment $62,000 $52,000 $150,000 $55,000 $10,000 $8,000 $20,000 $9,000 16.1% 15.4% 13.3% 16.4%

Answer 1

Since all the projects are above the MARR individually, we need to test with the smallest and test if the next bigger is producing an incremental MARR >= 12% and so on.

Hence for D - B, Initial cost = 3,000 and annual benefits = 1,000, IRR = 33.3%. So D is better than B.

Next we check for A - D, Initial cost = 7,000 and annual benefits = 1,000, IRR = 14.3%. So A is better than D.

Finally we check for C - A, Initial cost = 88,000 and annual benefits = 10,000, IRR = 11.4%. C is not better than A.

Hence we choose project A.