The cash flows for three different alternatives are given below. Assume that alt

Question

The cash flows for three different alternatives are given below. Assume that alternatives are replaced at the end of their useful lives.

Data

P

Q

R

Initial Cost

$5,000

$1,000

$2,500

Benefits /Year

$650

0

$ 350

Salvage Value

$5,000

$1,760

$2,500

Life in Years

20

5

10

MARR

                          8%

The incremental ROR between alternatives

Data

P

Q

R

Initial Cost

$5,000

$1,000

$2,500

Benefits /Year

$650

0

$ 350

Salvage Value

$5,000

$1,760

$2,500

Life in Years

20

5

10

MARR

                          8%

Explanation / Answer

Hi,

Please find the answer as follows:

Incremental Cash Flows Table:

To calculate incremental ROR, you need to put the value of NPV as 0 and solve for R as follows:

NPV = 0 = -2500 + 300/(1+r)^1 + 300/(1+r)^2 + + 300/(1+r)^3 + + 300/(1+r)^4 + + 300/(1+r)^5 + + 300/(1+r)^6 + + 300/(1+r)^7 + + 300/(1+r)^8 + 300/(1+r)^9 -2200/(1+r)^10 + 650/(1+r)^11 + 650/(1+r)^12 + 650/(1+r)^13 + 650/(1+r)^14 + 650/(1+r)^15 + 650/(1+r)^16 + 650/(1+r)^17 + 650/(1+r)^18 + 650/(1+r)^19 + 5650/(1+r)^20

Solving for r, we get ROR as 12.38 or 12%

Answer is 12%

Thanks.

Data Annual Cash Flows (P) Annual Cash Flows (R) Incremental Cash Flows Year 0 -5000 -2500 -2500 Year 1 650 350 300 Year 2 650 350 300 Year 3 650 350 300 Year 4 650 350 300 Year 5 650 350 300 Year 6 650 350 300 Year 7 650 350 300 Year 8 650 350 300 Year 9 650 350 300 Year 10 650 2850 -2200 Year 11 650 0 650 Year 12 650 0 650 Year 13 650 0 650 Year 14 650 0 650 Year 15 650 0 650 Year 16 650 0 650 Year 17 650 0 650 Year 18 650 0 650 Year 19 650 0 650 Year 20 5650 0 5650

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