The following cash flows represent two mutually exclusive investment alternative

Question

The following cash flows represent two mutually exclusive investment alternatives:

Year A1 A2
0 -$18,000 -$23,500
1 10,000 15,000
2 9,000 13,500
3 9,000 13,500
4 9,000 13,500
5 9,000 16,500

a. Find the IRR (Internal Rate of Return) on the incremental cash flow. For an MARR (Minimal Acceptable Rate of Return) of 15%, which one would you select?
b. Calculate the present worth on total investment for MARR = 12%(Minimal Acceptable Rate of Return)
c. Calculate the present worth on incremental investment for the same MARR (Minimal Acceptable Rate of Return) and select the best alternative.

Explanation / Answer

a. IRR for A1 -18000 + 10000/(1+r) +9000/(1+r)^2 +9000/(1+r)^3 +9000/(1+r)^4 + 9000/(1+r)^5 =0 IRR =43.45% IRR for A2 -23500 + 15000/(1+r) +13500/(1+r)^2 +13500/(1+r)^3 +13500/(1+r)^4 + 16500/(1+r)^5 =0 IRR =53.80% I would select A2 b. NPV of A1 =-18000 + 10000/(1+12%) +9000/(1+12%)^2 +9000/(1+12%)^3 +9000/(1+12%)^4 + 9000/(1+12%)^5 =15335.84296 NPV of A2=-23500 + 15000/(1+12%) +13500/(1+12%)^2 +13500/(1+12%)^3 +13500/(1+12%)^4 + 16500/(1+12%)^5 = 28206.045 c. I would select Project A2

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