Consider the following cost alternatives with 10 year useful lives. The company
ID: 2727946 • 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
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60000 | 8300 | 41000 | C
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65000 | 7200 | 44000 | D
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70000 | 6600 | 47000 | E
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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.
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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.
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c) Compare the results of your analyses in Parts (a) and (b) and discuss the reason behind any differences.
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Explanation / Answer
Solution.
Annual Inflow P.V of Inflow Year A B C D E F Table value A B C D E F 0 (50,000.00) (55,000.00) (60,000.00) (65,000.00) (70,000.00) (75,000.00) 1.0000 (50,000.00) (55,000.00) (60,000.00) (65,000.00) (70,000.00) (75,000.00) 1 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.8695 8,695.00 7,825.50 7,216.85 6,260.40 5,738.70 4,782.25 2 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.7561 7,561.00 6,804.90 6,275.63 5,443.92 4,990.26 4,158.55 3 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.6575 6,575.00 5,917.50 5,457.25 4,734.00 4,339.50 3,616.25 4 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.5717 5,717.00 5,145.30 4,745.11 4,116.24 3,773.22 3,144.35 5 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.4971 4,971.00 4,473.90 4,125.93 3,579.12 3,280.86 2,734.05 6 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.4323 4,323.00 3,890.70 3,588.09 3,112.56 2,853.18 2,377.65 7 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.3759 3,759.00 3,383.10 3,119.97 2,706.48 2,480.94 2,067.45 8 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.3269 3,269.00 2,942.10 2,713.27 2,353.68 2,157.54 1,797.95 9 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.2842 2,842.00 2,557.80 2,358.86 2,046.24 1,875.72 1,563.10 10 10,000.00 9,000.00 8,300.00 7,200 6,600.00 5,500.00 0.2471 2,471.00 2,223.90 2,050.93 1,779.12 1,630.86 1,359.05 Salvage Value 35,000.00 38,000.00 41,000.00 44,000 47,000.00 50,000.00 0.2471 8,648.50 9,389.80 10,131.10 10,872.40 11,613.70 12,355.00 IRR 3.20% -0.15% -2.49% -5.04% -6.58% -8.53%Related Questions
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