Question

in the incremental analysis question, how did we calculate the IRR of these two alternatives (C-A)? can you show it to me step by step?

Solution The next largest investment is in Alternative C, so examine the incremental investment of C over A. In the table below the IRR of C-A is shown. Alternative C- A Capital $12,000 $14,400 $2,400 investment $2,500 $3,050 $550 Net annual ncome 13.48% 15.86% IRR 12.99% 15.86% > MARR, so Alternative C "wins."

Answer 1

Let's first calculate how much percentage of capital investment with annual income;

Percentage return on capital investment for A;

12000*x/100=2500

Where x is unknown percentage on return.

Now,

x = 250000/12000

x=20.83%

Here we will deduct this percentage return from IRR,

20.83% - 12.99%

7.8433..,.............1

Now let's calculate for C;

x=305000/14400

x= 21.1805%

Again we will deduct this expected percentage from IRR;

21.1805%-13.48%

7.7005%...........2

Now IRR of C-A;

Equation (1)% + Equation (2)% =7.8433%+7.7005%

= 15.54%(approximately).