Four mutually exclusive projects are being considered for a new two-mile jogging
ID: 1180546 • Letter: F
Question
Four mutually exclusive projects are being considered for a new two-mile jogging track. The life of the track is expected to be 80 years, and the sponsoring agency's MARR is 12 percent per year. Annual benefits to the public have been estimated by an advisory committee and are shown below. Use the IRR method (incrementally) to select the best jogging track. See table below. Please show work to recieve five stars and be very detailed.
Four mutually exclusive projects are being considered for a new twi-mile jogging track. The life of the tracl is expected to be 80 years, and the sponsoringExplanation / Answer
Answer
In capital budgeting, projects are evaluated by comparing the internal rate of return (IRR) on a project to the minimum acceptable rate of return (MARR). Under this approach, if the IRR is equal to or greater than MARR, the project is selected but if not then it is rejected. Here MARR is 12% per year.
The internal rate of return (IRR) is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
We have to find IRR by trial and error method by assuming different discount rates.
Project A
Suppose Discount rate is 16.1289%
Figures in$
Year
Cash flow
Disc Rate: 16.1289%
Present value
A
B
A*B
0
-62000
1
-62000.00
1-80 year
10000
6.20
62000
Net present value
0
IRR
16.1289%
Project B
Suppose Discount rate is 15.38445%
Figures in $
Year
Cash flow
Disc Rate: 15.38445%
Present value
A
B
A*B
0
-52000
1.00
-52000.00
1-80 year
8000
6.50
52000
Net present value
0.00
IRR
15.38445%
Project C
Suppose Discount rate is 13.3327 %
Figures in $
Year
Cash flow
Disc Rate: 13.3327%
Present value
A
B
A*B
0
-150000
1.00
-150000.00
1-80 year
20000
7.50
150000.4
Net Present value
0
IRR
13.3327%
Project D
Suppose Discount rate is 16.36355%
Figures in $
Year
Cash flow
Disc Rate: 16.36355%
Present value
A
B
A*B
0
-55000
1.00
-55000.00
1-80 year
9000
6.11
55000.0
Net Present value
0.0
IRR
16.36355%
Answer: IRR of Project D is more than MARR of 12% p.a. and highest among all projects (i.e Among IRR of Project A, Project B, Project C, Project D). All projects are mutually exclusive. So Project D Should be selected.
Figures in$
Year
Cash flow
Disc Rate: 16.1289%
Present value
A
B
A*B
0
-62000
1
-62000.00
1-80 year
10000
6.20
62000
Net present value
0
IRR
16.1289%
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