Question

Consider the two mutually exclusive investment projects given in the table below. Click the icon to view the cash flows for the projects. (a) To use the IRR criterion, what assumption must be made in comparing a set of mutually exclusive investments with unequal service lives? Select all that apply. A. The required service period is 3 years. B. The required service period is infinity. C. Project A2 can be repeated at the same cost in the future. D. Project A1 can be repeated at the same cost in the future. (b) With the assumption made in part (a), determine the range of MARRs which will indicate that project A1 should be selected. Select the correct choice below and fill in the answer box to complete your choice. (Round to one decimal place.) - X OA. MARR More Info % - OB. MARR = % O C. MARR> % n 0 1 2 3 Net Cash Flow Project A1 Project A2 - $12,000 - $17,000 7,000 24,000 7,000 7,000

Answer 1

Part (a)

A2 has a smaller life. Hence A2 should be repeated.

Hence, the correct answer is option C.

Part (b)

n	A1	A2	Repeat A2	Repeat A2	Total A2	Total A2 - A1
0	-12000	-17000			-17000	-5000
1	7000	24000	-17000		7000	0
2	7000		24000	-17000	7000	0
3	7000			24000	24000	17000
IRR						50.4%

Cross over rate is 50.4%

Crossover rate A1 A2 20,000 15,000 10,000 NPV 5,000 5% 15.00% 25.00% 35.00% 45.00% 55.000 65.00% 75.00% 85.00% -5,000 -10,000 Discount Rate

Hence, A1 has higher NPV only when discount rate > cross over rate.

Hence, the correct answer is option C. MARR > 50.4%