Question

7. (3 pts) You are presented with three investment possibilities, however you only have enough money to invest in one (the opportunities are mutually exclusive). The MARR is 9%. Which one should be chosen? Make a decision based on an incremental rate of return analysis. А в 100K 110K 120K AB 55K 27K SALV 20K 35K 40K Life 6 yrs 6 yrs ROR 12% 11% 8% 45K 3 yrs

Answer 1

Solution :-

We should Reject Alternative C as in this ROR (8%) is less than MARR (9%)

Now we need to compare between Alternative A and B

As we need to compare with incremental ROR

Now we need to make life of both alternatives same to compare

So Assume that after 3 year we again invest for 3 years in alternative A .

So in case of Alternative A

Cash flow in Year 3 = Annual Benefit + Salvage Value - Initial Investment

= 55,000 + 20,000 - 100,000

= - $25,000

Cash flow in Year 6 = Annual Benefit + Salvage Value

= 55,000 + 20,000

= $75,000

In Case of Alternative B

Cash flow in Year 6 =

= 45,000 + 35,000

= $80,000

As Initial Investment in Alt B is greater than Alt A

So we need to deduct cash flow of Alt A from Alt B

- fx N16 A B C D Year Alt A ($100,000) $55,000 $55,000 ($25,000) $55,000 $55,000 $75,000 Alt B ($110,000) $45,000 $45,000 $45,000 $45,000 $45,000 $80,000 Incremental Cashflows ($10,000) ($10,000) ($10,000) $70,000 ($10,000) ($10,000) $5,000 3 5 6 IRR 38.33% Formula IRR(D4:D10) 15 16 17

Now as Incremental ROR is greater than MARR

So Choose Alternative B

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