The four alternatives described below are being evaluated: W X Y Z The Increment

Question

The four alternatives described below are being evaluated:

W

X

Y

Z

The Incremental IRRs are:

IRRW-Y = 7%
IRRW-X = 20%
IRRX-Y = 1%
IRRZ-X = 14%
IRRZ-Y = 10%
IRRZ-W = 12%

If the alternatives are independent, which one(s) should be selected if MARR = 15.5%/year?

None of the above

If the alternatives are mutually exclusive, which one(s) should be selected if MARR = 9.5%/year?

Alternative

W

X

Y

Z

Initial Investment $100,000 $75,000 $40,000 $200,000 IRR 16% 15% 29% 14%

Explanation / Answer

Answer -1 both can be selected because they are independent ROR W = 16% > MARR = SELECT W ROR Y = 29% > MARR = SELECT Y Answer -2 b) Y to DN: i* = 29% > 9.5%, eliminate DN. X to Y: Di* = 1% < 9.5%, eliminate X W to Y: Di* = 7% < 9.5%, eliminate Y Z to Y: Di* = 10% > 9.5%, eliminate Z Therefore, select alternative Z

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