An investment committee is evaluating three proposals with the investment, estim

Question

An investment committee is evaluating three proposals with the investment, estimated annual cash flows, and estimated salvage values shown below. A MARR of 15% and a six year time-span is to be used. Which ones should be approved from a financial perspective if all could fit within the investment budget if they meet investment criteria.? Determine which one should be selected using only the internal rate of return criterion.   Proposal Investment Annual cash flow Salvage in last year A1 ($1,750,000) $400,000 $500,000 A2 ($1,550,000) $400,000 $25,000 A3 ($1,300,000) $370,000 $10,000 MARR Years 15.0% 6 An investment committee is evaluating three proposals with the investment, estimated annual cash flows, and estimated salvage values shown below. A MARR of 15% and a six year time-span is to be used. Which ones should be approved from a financial perspective if all could fit within the investment budget if they meet investment criteria.? Determine which one should be selected using only the internal rate of return criterion.   Proposal Investment Annual cash flow Salvage in last year A1 ($1,750,000) $400,000 $500,000 A2 ($1,550,000) $400,000 $25,000 A3 ($1,300,000) $370,000 $10,000 MARR Years 15.0% 6

Explanation / Answer

Solution At IRR, NPV = 0 Computation of IRR:- Enhancement A1 Particulars Initial investmtne 5000000 Annual Cash flows $       1,750,000.00 PVAF @10% 3.17 PVAF @15% 2.855 NPV @10% $           547,500.00 NPV @15% $             (3,750.00) Computing IRR using interpolation:- IRR = 10% + (5%/(547500+3750))*547500 IRR = 14.97% Enhancement A2 Particulars Initial investmtne 4400000 Annual Cash flows $       1,550,000.00 PVAF @15% 2.855 PVAF @20% 2.589 NPV @15% $             25,250.00 NPV @20% $        (387,050.00) Computing IRR using interpolation:- IRR = 15% + (5%/(25250+387050))*25250 IRR = 15.31% Enhancement A3 Particulars Initial investmtne 3700000 Annual Cash flows $       1,300,000.00 PVAF @15% 2.855 PVAF @20% 2.589 NPV @15% $             11,500.00 NPV @20% $        (334,300.00) Computing IRR using interpolation:- IRR = 15% + (5%/(11500+334300))*11500 IRR = 15.17% Enhancement IRR A1 14.97% A2 15.31% A3 15.17% On the basis of IRR of each enhancement A2 should be selected as it is yielding the highest IRR and more the IRR means higher the NPV and yield to the investors.

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