For the following table, assume a MARR of... For the following table, assume a M

Question

For the following table, assume a MARR of...

For the following table, assume a MARR of 8% per year and a useful life for each alternative of six years that equals the study period. The rank-order of alternatives from least capital investment to greatest capital investment is Do Nothing A ? C ? B. Complete the IRR analysis by selecting the preferred alternative Do Nothing A A C ? Capital investment ? Annual revenues ? Annual costs ? Market value ? IRR - $15,000 4,000 - 1,000 6,000 12.796 $2,000 900 - 150 -2,220 10.596 - $3,500 450 - 100 3.400 The IRR of ? (C-+ B) is | %. (Round to one decimal place.)

Explanation / Answer

IRR of ? (C ? B)

? Capital Investment = -3,500

? Annual Revenues = 450

? Annual Costs = -100

? Market Value = 3,400

MARR = 8%, Study Period = 6 year

Calculate Net Annual Cash Flow

NACF = Annual Revenues – Annual Costs

450 – 100 = 350

Use Trial and Error Method

NPW at MARR of 8%

NPW = -3,500 + 350 (P/A, 8%, 6) + 3,400 (P/F, 8%, 6)

NPW = -3,500 + 350 (4.6229) + 3,400 (0.6302)

NPW = 362

NPW is positive, increase MARR to 10% and calculate NPW to get negative NPW

NPW at 10%

NPW = -3,500 + 350 (P/A, 10%, 6) + 3,400 (P/F, 10%, 6)

NPW = -3,500 + 350 (4.3553) + 3,400 (0.5645)

NPW = -56

Using Interpolation

IRR of ? (C ? B) = 8% + [362 – 0 / 362 – (-56) * 2 = 9.7%

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