You are given the cash flow series for two projects, Alt. A and Alt. B. YEAR 0 1

Question

You are given the cash flow series for two projects,

Alt. A and Alt. B.

YEAR 0 1 2 3 4 5 6

Alt. A - F1 X X X X X X + S1

Alt. B - F2 Y Y Y Y Y Y + S2

Assume that F2 > F1, and X, Y, S1, and S2 are positive; the incremental rate of return (i*) on the additional investment in Alt. B can be calculated with the following expression: choose one (please tell me why! Thank you!)

0 = - F2 + Y (P/A, i*, 6) + S2(P/F, i*, 6)

0 = - (F2 - F1) + (Y - X)(P/A, i*, 5) + (S2 - S1)(P/F, i*, 6)

0 = - (F2 - F1)(F/P, i*, 6) + (Y - X)(F/A, i*, 6) + (S2 - S1)

0 = - (F2 - F1) + (Y - X) + (Y + S2) - (X + S1)

0 = (F1 - F2)(F/P, i*, 6) + (X - Y)(F/A, i*, 6) + (S2 - S1)

0 = - F1 + X(P/A, i*, 6) + S1(P/F, i*, 6)

0 = - F2 + Y(P/A, i*, 6) + S2(P/F, i*, 6)

0 = - F1 + X(P/A, i*, 5) + S1(P/F, i*, 6)

0 = - F2 + Y(P/A, i*, 5) + S2(P/F, i*, 6)

Explanation / Answer

incremental rate of return would be calculated by following expression:

0 = - (F2 - F1) + (Y - X)(P/A, i*, 5) + (S2 - S1)(P/F, i*, 6)

Initial investmnet will be always equal to the present value of future cash flows and initial investmnet will not be discounted because the investmnet is meade at the begining of the project.

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