Question

Use the following information to answer questions 9 and 10. You must decide between the following two potential altermatives using Rate of Return Analysis. MARK-12%, Alternative #1 25,000 Alternative W 40,000 Initial C Benefits O&M Costs Salvage Life (in years) $11,000 per year $10,000 per year $3,000 per year S2,000 per year $5,000 5,000 16.27% 9. The ROR for Alternative w2 is closest to... a) 13.25% b) 32.5% C) 1 1.81% d)20% e) 25% 012.47% g) 6.34% h) 18.77% i) 24.52% ]246+/18% pmr(15% -12% -12% j) 5.88% 10. The rate of return necessary to make a decision is closest to a)13.25% b) 32.5% c)11.81% d) 20% e) 25% 012.47% k)16.27% 1) 21.57% m) 17.44% n) 0.00% 0) 3.21% p) 4.49% q)15.31% r)-5.47% s)-10.82% t)-13.45% u)14.09% v)21.37% w)-21.37% x)-8.51% y)-4.8% z) 7.46% ab) 19.58% ac) 1.05% ad)-1.05% ae)-19.58% af)-17.54% ag) 45.73% ah) 78.57% ai) 3.02% aj)-3,02% g) 6.34% h) 18.77% i) 24.52% j)5.88%

Answer 1

ANSWER:

The calculations have been done in excel.

year	0	1	2	3	4	5	6	7	8
initial cost	-40,000
benefits		10,000	10,000	10,000	10,000	10,000	10,000	10,000	10,000
o and m costs		-2,000	-2,000	-2,000	-2,000	-2,000	-2,000	-2,000	-2,000
salvage value									5,000
cash flows	-40,000	8,000	8,000	8,000	8,000	8,000	8,000	8,000	13,000
irr	13.19%

in excel we will use the irr formula.

=irr(cash flow in year 0 till cash flow in year 8)

=irr(-40,000,8000,8000,8000,8000,8000,8000,8000,8000)

= 13.19%

our answer is closest to option a of 13.25% (difference is due to calculations manually and in excel).

and hence option a is the right answer.