Question

Consider the three projects with cash flows shown in the table below. If these projects are mutually exclusive, which project would you select? Support your choice using a rate of return analysis approach. Show your work and if necessary you MUST use an RIC method to find the true IRR. n Option A Option B Option C 0 $7,000 $6,250 $12,500 1 9,500 5,500 7,531 -200 3,500 9,156 33.58% 30.81% 20.86% You may assume the following in your work: • Any non-simple investment is also a mixed investment • MARR is 16% • IRRIOption A - Ootion B) 13.7%

Answer 1

Ans Step 1 Lets prepare the cash flow table first Year Option A Option B Option C -7000 -6250 -12500 9500 5500 7531 -2001 35009 156 Step 2 - Compare Internal Rate of Return vs MARR (Minimum Acceptable Rate of Return) IRR (Internal Rate of Return of projects is as follows: IRR MARR is give as Option A 33.58% 16% Option B 30.81% 16% Option 20.86% 16% For all the 3 projects the IRR is more than MARR so all 3 projects can be selected Step 3 Ranking of Projects Since the projects are mutually exclusive we can use NPV method to rank them Net Present Value 1041 1092 797 Based on this Project B has the highest NPV So Project B should be selected.