Question

Consider the four independent alternatives that have 5-year useful life and no salvage value. Alternatives: A B C D Initial Cost (A)$400,000 (B)$100,000 (C)$200,000 (D)$500,000 Uniform Annual Benefit (A)$100,900 (B)$27,700 (C)$46,200 (D)$125,200 ROR (A)8.3% (B)11.9% (C)5% (D)8% Write an equation to determine what alternative to select if MARR is 6%. What is your recommendation if MARR is 10%? And if MARR is 15%?

Answer 1

ALTERNATIVE A

	year 0	year 1	year2	year3	year 4	year 5
initial investment	-400000
annual revenue		100900	100900	100900	100900	100900
	-400000	100900	100900	100900	100900	100900
ROR	8.3%
NPV	$ -277.89
IRR	8%

ALTERNATIVE B

	year 0	year 1	year2	year3	year 4	year 5
initial investment	-100000
annual revenue		27700	27700	27700	27700	27700
	-100000	27700	27700	27700	27700	27700
ROR	11.9%
NPV	$ 89.51
IRR	12%

ALTERNATIVE C

	year 0	year 1	year2	year3	year 4	year 5
initial investment	-200000
annual revenue		46200	46200	46200	46200	46200
	-200000	46200	46200	46200	46200	46200
ROR	5.0%
NPV	$ 20.78
IRR	5%

ALTERNATIVE D

	year 0	year 1	year2	year3	year 4	year 5
initial investment	-500000
annual revenue		125200	125200	125200	125200	125200
	-500000	125200	125200	125200	125200	125200
ROR	8.0%
NPV	$ -104.35
IRR	8%

so ALTERNATIVE B is best with MARR of 6% having IRR of 12% and a positive NPV of $89

ALTERNATIVE A can not be selected it has negative NPV

ALTERNATIVE C can not be selected it has IRR of less than 6% of MARR i.e. 5%

ALTERNATIVE D can not be selected as it has negative NPV

if MARR is changed to 10% still answer is same ALTERNATIVE B Is feasible as it has IRR of 12%

but is MARR is changed to 15% NONE OF THE ALTERNATIVES are feasible since even the highest IRR of all is 12% which is well below the MARR of 15%