Clould you please explain with details because I want to learn by following your

Question

Clould you please explain with details because I want to learn by following your solution steps.

1) For the following altematives, determine the preferred one using the IRR method. Market value is taken as 20% of the initial capital investment. The useful life of each alternative is 5 years. (MARR: 8 %) Alt 1 Alt 2 Alt 3 Alt 4 Capital investment 117.400127.000 100,000 108.20 Annual expenses 24,711 311 29,01126,911 Write your answers in the following table. Please note that you may not need to fill all the fields Increment Considered Capital investment (10 pts each) Annual savingS Market Value Useful life (vears IRR Is increment justified? (2 pts each) What is the base altemativ What is the best alternative (5 pts) (5 pts)

Explanation / Answer

The base alternative is the one having lowest capital investment which is alt. 3.

Now, Alt. 1

Change in capital investment = (100000-117400) = -17400

Annual savings = (29011-24711) = 4400

Change in market value = 0.2*17400 = 3480

Useful life = 5 years

IRR can be calculated in excel as = IRR(series of cash flows)

= IRR (-17400,4400,4400,4400,4400,7880)

= 12.92%

Yes it is justified, since IRR is greater than MARR.

Alt 2:

Change in capital investment = (100000-127000) = -27000

Annual savings = (29011-22311) = 6700

Change in market value = 0.2*27000 = 5400

Useful life = 5 years

IRR can be calculated in excel as = IRR(series of cash flows)

= IRR (-27000,6700,6700,6700,6700,12100)

= 12.29%

Yes it is justified, since IRR is greater than MARR.

Alt 4

Change in capital investment = (100000-108200) = -8200

Annual savings = (29011-26911) = 2100

Change in market value = 0.2*8200 = 1640

Useful life = 5 years

IRR can be calculated in excel as = IRR(series of cash flows)

= IRR (-8200,2100,2100,2100,2100,3740)

= 13.35%

Yes it is justified, since IRR is greater than MARR.

Best alternative is alt 4, since it has the highest incremental IRR.

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