(2) The 3 alternatives below all have infinite lives. Determine which alternativ
ID: 2795385 • Letter: #
Question
(2) The 3 alternatives below all have infinite lives. Determine which alternative should be selected using the incremental rate of return method. The MARR Is 20% per year. First Cost ($) Annual income (S/yr) Annual expenses ($/yr) Alternative A Alternative B Alternative C 28,000 17,000 2,500 55,000 20,000 3,000 42,000 18,000 1,500 (i) Compare the alternatives based on the incremental capitalized cost (i) You must calculate each incremental rate of return to the nearest whole ercent. Donotsubstitute the MARR of 20% per year into the equation but compare the incremental rate of return to make the decision (ii) Since there is positive cash flow, start by comparing the least expensive alternative to the Do-Nothing (DN) alternative No credit is given if the analysis procedure or if the comparison made at any point in the solution igncorrect. The solution must be shown in logical order and must be appropriately documented. Clearly label each comparison made and the alternative selected in each case. Show all work including factor notation, equations, values of factors etc., to demonstrate how the rate of return was determined State which project is finally selected. (iv) (v) The selected alternative isExplanation / Answer
The answer to Question no. i.
The formula for incremental capitalized cost is as follows:
Alternative A:
ICC= 55000 + 3000(1 divided by 20%) = 55000+15000 = 70,000
Alternative B:
ICC= 28000+2500(1 divided by 20%) = 28000+12500 = 40,500
Alternative C:
ICC= 42000 + 1500(1 divided by 20%) = 42000+7500 = 49,500
Anser Question No. ii.
The incremental rate of return can be calculated as follows:
Alternative A
IRR: 17000/55000 = 31%
Alternative B
IRR: 14500/28000 = 52%
Alternative C
IRR: 42000/16500 = 39%
Incremental rate of return is best for Alternative B
The answer to question no. iii)
Hence the best Alternative is Alternative B
The answer to question no. V)
The best alternative in all regards is Alternative B for the selection of the project.
NPV = FV/MARR Initial Investment Profit Profit % Alternative A 85000 55000 30000 55% Alternative B 72500 28000 44500 159% Alternative C 82500 42000 40500 96%Related Questions
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