Question

115 1. Explain the differences between evolutionary (spiral) and incremental lifecycles 2. Using a MARR of 8%, a study period of 8 years, and a rate of return method, determine which among the alternatives in the table below is the best choice: Alternative Capital Investment $40,000 $80,000 $60,000 $90,000 Annual Expenses $12000 $8000 $10,000 $6000

Can someone help me with this problem

Answer 1

MARR = 8%

We need to perform incremental IRR analysis

In order to calculate incremental IRR, first, we arrange the options in the increasing value of their initial cost

Alternatives in increasing order of initial cost are A < C < B < D

We need to find incremental cash flow between lowest and second-lowest option first, then use the formula of IRR in excel on the incremental cash flow, if incremental IRR is greater than MARR then select the second lowest option if it is less than the MARR then select the lowest option.

We need to keep repeating the above until the last option is evaluated

Year	A	C	B	D	C-A	B-A	D-A
0	-40000	-60000	-80000	-90000	-20000	-40000	-50000
1	-12000	-10000	-8000	-6000	2000	4000	6000
2	-12000	-10000	-8000	-6000	2000	4000	6000
3	-12000	-10000	-8000	-6000	2000	4000	6000
4	-12000	-10000	-8000	-6000	2000	4000	6000
5	-12000	-10000	-8000	-6000	2000	4000	6000
6	-12000	-10000	-8000	-6000	2000	4000	6000
7	-12000	-10000	-8000	-6000	2000	4000	6000
8	-12000	-10000	-8000	-6000	2000	4000	6000
IRR					-4.7%	-4.7%	-0.9%

We compare first A and C, since A has the lowest cost, and the second lowest option is C, incremental IRR is less than MARR so we select A, and reject C

Now we find incremental cash flow between B & A, we find incremental IRR<MARR, so we select A again and reject B

Now we find incremental cash flow between D & A, we find incremental IRR<MARR, so we select A again and reject D

A option should be selected as per the incremental analysis   

Showing formula in excel

Year	A	C	B	D	C-A	B-A	D-A
0	-40000	-60000	-80000	-90000	=D274-C274	=E274-C274	=F274-C274
1	-12000	-10000	-8000	-6000	=D275-C275	=E275-C275	=F275-C275
2	-12000	-10000	-8000	-6000	=D276-C276	=E276-C276	=F276-C276
3	-12000	-10000	-8000	-6000	=D277-C277	=E277-C277	=F277-C277
4	-12000	-10000	-8000	-6000	=D278-C278	=E278-C278	=F278-C278
5	-12000	-10000	-8000	-6000	=D279-C279	=E279-C279	=F279-C279
6	-12000	-10000	-8000	-6000	=D280-C280	=E280-C280	=F280-C280
7	-12000	-10000	-8000	-6000	=D281-C281	=E281-C281	=F281-C281
8	-12000	-10000	-8000	-6000	=D282-C282	=E282-C282	=F282-C282
IRR					=IRR(G274:G282)	=IRR(H274:H282)	=IRR(I274:I282)