An investment committee has narrowed down their investment decision to three pro

Question

An investment committee has narrowed down their investment decision to three proposals. Further information was collected on these three proposals and the investment amounts, estimated annual cash flows, and estimated salvage values are shown below.   Determine which one maximizes the financial worth of the company using the internal rate of return criterion only. Use a MARR of 15% and a three year time horizon The committee only considers the IRR criterion. Proposal Investment Year 1 Year 2 Year 3 Salvage in last year A1 ($1,250,000) $970,000 $640,000 $250,000 $300,000 A2 ($1,050,000) $480,000 $500,000 $600,000 $350,000 A3 ($1,750,000) $650,000 $700,000 $800,000 $750,000 MARR 15.0% Years 3 An investment committee has narrowed down their investment decision to three proposals. Further information was collected on these three proposals and the investment amounts, estimated annual cash flows, and estimated salvage values are shown below.   Determine which one maximizes the financial worth of the company using the internal rate of return criterion only. Use a MARR of 15% and a three year time horizon The committee only considers the IRR criterion. Proposal Investment Year 1 Year 2 Year 3 Salvage in last year A1 ($1,250,000) $970,000 $640,000 $250,000 $300,000 A2 ($1,050,000) $480,000 $500,000 $600,000 $350,000 A3 ($1,750,000) $650,000 $700,000 $800,000 $750,000 MARR 15.0% Years 3

Explanation / Answer

A1 is the best project to undertake as it has the highest IRR.

Proposal Investment Year 1 Year 2 Year 3 Salvage in last year (1+IRR) IRR A1 ($1,250,000) $970,000 $640,000 $250,000 $300,000 1.38 38% A2 ($1,050,000) $480,000 $500,000 $600,000 $350,000 1.33 33% A3 ($1,750,000) $650,000 $700,000 $800,000 $750,000 1.25 25% Let (1+IRR) be A1,A2 and A3 respectively. =B2+C2/G2+D2/G2^2+E2/G2^3+F2/G2^3=0 =B3+C3/G3+D3/G3^2+E3/G3^3+F3/G3^3=0 =B4+C4/G4+D4/G4^2+E4/G4^3+F4/G4^3=0 By solving we get IRRs to be 38%,33% and 25%

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