Three mutually exclusrve design anernat es are ben co sde ed The es mated cash f

Question

Three mutually exclusrve design anernat es are ben co sde ed The es mated cash flows for each ahemate ae geen below The MARR-18% per year A·the end of the usetite the m emet decsion-maker can select one of these alternatives or decide to select none of them Make a recommendation using the PW method be told A 29 000 56.000 $37 500 Annual expenses $16.000 $13.000 $22000 3,000 $28,000 $30,000 6000 $8,500 $9.000 10 years10 years 10 years Annual nevenues Market value Useful ife IRR 241%--181% 21 3% ick the Kon to vee te nterest and muty table for doc rete compoundng when-18% per reat The PW of abernabe AisSRand tore nearest dolar ) The PWofallernabveBS(Rond tore nearest dolar ) What abernative should be selected? Choose the comect answer below Cck t0 select your answerns)

Explanation / Answer

As per IRR

Thus Option B gives the maximum return in actual terms and hence go in Option A.

As per NPV

The MARR is 20% and all the three projects computed rate of return is greater than or equal to 20% anyone could be accepted. But since we have to select only one alternative we should go in for Project B because it has higher NPV

Incremental IRR is 22.82%

A B C Initial cost 29000 56000 37500 Annual Expenses 16000 13000 22000 Annual Revenue 23000 28000 30000 Annual Net Income 6000 8500 9000 PV factor 4.1925 4.1925 4.1925 PV of income 33540 62887.5 41925 Salvage value 6000 8000 10000 PV factor 0.1615 0.1615 0.1615 PV of salvage value 969 1292 1615 PV of net income 34509 64179.5 43540 Benefit = PV of net income -Initial cost 6509 9179.5 3540 IRR of the project 26.36% 24.65% 22.40%

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