Luxury Limo Service International is evaluating two alternatives for upgrading i
ID: 2714362 • Letter: L
Question
Luxury Limo Service International is evaluating two alternatives for upgrading its limousine fleet for a more luxurious customer experience. With the investment in their fleet, they anticipate that they will be able to increase customer rates, resulting in a higher revenue stream for the remaining five years of the fleet’s useful life. An analysis of the two vendor proposals, Ace Detailing and Cosmic Cloud, have resulted in the following expected incremental cash flows:
Year
Ace Detailing
Cosmic Cloud
0
$ (175,000)
$ (225,000)
1
$ 85,000
$ 125,000
2
$ 95,000
$ 110,000
3
$ 60,000
$ 60,000
4
$ 60,000
$ 50,000
5
$ (25,000)
$ (25,000)
Luxury Limo Service International uses an 8% discount rate for all of its projects.
Calculate the Modified Internal Rate of Return (MIRR) for each vendor proposal. Which proposal would you select based on this decision rule? Why?
Explain why Internal Rate of Return (IRR) is not appropriate for the evaluation of this investment opportunity, using the results of the IRR calculations to support your explanation.
Year
Ace Detailing
Cosmic Cloud
0
$ (175,000)
$ (225,000)
1
$ 85,000
$ 125,000
2
$ 95,000
$ 110,000
3
$ 60,000
$ 60,000
4
$ 60,000
$ 50,000
5
$ (25,000)
$ (25,000)
Explanation / Answer
Luxury Limo Service International is evaluating two alternatives for upgrading i
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