\\ The following mutually exclusive investment alternatives have been presented
ID: 1090968 • Letter: #
Question
The following mutually exclusive investment alternatives have been presented to you.
A
B
C
D
E
Capital investment
Annual expenses
Annual revenues
MV at EOY 10
IRR
$60,000
$30,000
$50,000
$15,000
31.5 %
$90,000
$40,000
$52,000
$15,000
7.4 %
$40,000
$25,000
$38,000
$10,000
30.8 %
$30,000
$15,000
$28,000
$10,000
42.5 %
$70,000
$35,000
$45,000
$15,000
9.2 %
The life span of all alternatives is 10 years. Using a MARR of 15 % per year, what is the preferred alternative? (Choose the one best answer from the choices given below.)
Do nothing
Alternative A
Alternative B
Alternative C
Alternative D
Alternative E
A
B
C
D
E
Capital investment
Annual expenses
Annual revenues
MV at EOY 10
IRR
$60,000
$30,000
$50,000
$15,000
31.5 %
$90,000
$40,000
$52,000
$15,000
7.4 %
$40,000
$25,000
$38,000
$10,000
30.8 %
$30,000
$15,000
$28,000
$10,000
42.5 %
$70,000
$35,000
$45,000
$15,000
9.2 %
Explanation / Answer
Based on IRR, ALternative D is best,
ALternative B and E is out of question, because their IRR<MARR
Based on NPV
NPV of alternative A = -60,000+(50,000-30,000)*PVIFA(15%,10)+(15,000/1.15^10)
NPV = -60,000+(50,000-30,000)*5.0188+(15,000/1.15^10) = $44083.77
NPV of alternative C = -40,000+(38,000-25,000)*PVIFA(15%,10)+(10,000/1.15^10)
NPV = -40,000+(38,000-25,000)*5.0188+(10,000/1.15^10) = $27,716.24
NPV of alternative D = -30,000+(28,000-15,000)*PVIFA(15%,10)+(10,000/1.15^10)
NPV = -30,000+(28,000-15,000)*5.0188+(10,000/1.15^10) = $37716.24
Alternative A has highest NPV so option B is answer
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