Consider the following cost alternatives with 10 year useful lives. The company
ID: 2727704 • Letter: C
Question
Consider the following cost alternatives with 10 year useful lives. The company has a MARR = 15%.
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initial | Annual | Salvage |Alternative
investment | O&M | value |
| costs | |
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50000 | 10000|35000 | A
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55000 |9000 | 38000 | B
_____________________________________
60000 | 8300 | 41000 | C
____________________________________
65000 | 7200 | 44000 | D
____________________________________
70000 | 6600 | 47000 | E
___________________________________
75000 | 5500 | 50000 | F
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a) Using suitable Excel functions, perform an incremental IRR analysis to determine the best alternative. Clearly lay out each step of
the analysis and its conclusion.
b) Using suitable Excel functions, perform an incremental ERR analysis to determine the best alternative. Use an external
borrowing/re-investment rate of = 12%. Clearly lay out each step of the analysis and its conclusion.
c) Compare the results of your analyses in Parts (a) and (b) and discuss the reason behind any differences.
Explanation / Answer
In this case we need to calculate Modified IRR because annual Cash flow is negative but salvage value is positive.
Modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost.
The Excel MIRR function returns the Modified Internal Rate of Return for a supplied series of periodic cash flows (i.e. a set of values, which includes an initial investment value and a series of net income values).
The syntax of the function is: MIRR( values, finance rate,reinvest rate )
IRR AT 12%
Difference in IRR is due to Different finance rate
Year Cashflow (A) Cashflow (B) Cashflow (C) Cashflow (D) Cashflow (E) Cashflow (F) 0 -50000 -55000 -60000 -65000 -70000 -75000 1 -10000 -9000 -8300 -7200 -6600 -5500 2 -10000 -9000 -8300 -7200 -6600 -5500 3 -10000 -9000 -8300 -7200 -6600 -5500 4 -10000 -9000 -8300 -7200 -6600 -5500 5 -10000 -9000 -8300 -7200 -6600 -5500 6 -10000 -9000 -8300 -7200 -6600 -5500 7 -10000 -9000 -8300 -7200 -6600 -5500 8 -10000 -9000 -8300 -7200 -6600 -5500 9 -10000 -9000 -8300 -7200 -6600 -5500 10 25000 29000 32700 36800 40400 44500 IRR -13% -11% -11% -9% -9% -8%Related Questions
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