QUESTION 23 Two alternatives have the following cash flows: Alternative Year A B 0 -$10000 -$15000...
QUESTION 23
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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?
Homework Answers
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
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QUESTION 23
Two alternatives have the following cash flows:
Alternative
Year
A
B
0
-$10000
-$15000...
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