Question

The one best alternative must be chosen for a project. The initial project starting Costs are shown below. The company's MARR S . Osing a year period, determine which proposal should be selected by a) the AW method, and bl the incremental rate-of-return method. Project Proposal Alternatives $15,000 Start-up costs $20,000 $5,000 $25,000 $7,000 $3,000 Annual income

Answer 1

Determining the Annual worth of the proposals

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AW1 = -15,000(A/P,5%.5) + 3,000

AW₁ = - 15,000 × 0.23097 + 3,000

AW₁ = - 3,464.62 + 3,000

AW₁ = - $ 464.62.

Now calculating AW of 2

AW2 = -20,000(A/P,5%, 5) + 5,000

AW₂ = - 20,000 × 0.23097 + 5,000

AW₂ = - 4,619.50 + 5,000

Annual worth = $ 380.50

Annual worth of 3

AW₃ = - 25,000 * 0.23097 + 7,000

AW₃ = - 5,774.37 + 7,000

AW₃ = $ 1,225.63

For incremental IRR analysis select proposal 1 as base alternative since it has lowest initial investment. Then subtract it from second lowest cash flow that is proposal 2. Then determine the IRR. Refer the attached picture

Year P1 P2 P3 P2 - P1 0 -15000 - 20000 -25000 -5000 | 1 | 3000 5000 7000 2000 3000 5000 | 7000 | 2000 3000 5000 7000 2000 3000 5000 7000 2000 5 3000 5000 7000 2000 28.65% P3 - P2 -5000 2000 2000 2000 2000 2000 28.65%

The incremental IRR of proposal 2 - 1 = 28.65%.

Reject 1 and accept 2.

Next determine the incremental cash flow of proposal 3 - proposal 2.

The incremental cash flow is 28.65%. thus reject lower cost investment. Please accept proposal 3.