Question

QUESTION 23

1. Two alternatives have the following cash flows:

   Alternative
   Year	A	B
   0	-$10000	-$15000
   1	+$3000	+$4400
   2	+$3000	+$4400
   3	+$3000	+$4400
   4	+$3000	+$4400

   Assuming a 5% MARR, use incremental analysis to determine which alternative should be selected?

Answer 1

incremental initial cost (B-A) = 15000 - 10000 = 5000

Incremental annual benefit = 4400 - 3000 = 1400

Let incremental IRR be I%, then

-5000 + 1400 * (P/A, I%,4) = 0

1400 * (P/A, I%,4) = 5000

Dividing by 200

7 * (P/A, I%,4) = 25

When I = 5%, value of 7 * (P/A, I%,4) = 24.821654

When I = 4%, value of 7 * (P/A, I%,4) = 25.409267

using interpolation

I = 4% + (25.409267 - 25) / (25.409267 - 24.821654) *(5% -4%)

I = 4% + 0.6964%

I = 4.70%

As incremental IRR < MARR, so option A should be selected