The cash flows and other info for three different projects are given in the tabl

Question

The cash flows and other info for three different projects are given in the table below. If MARR needs to be at least 10.00%, state below which is the best project and why? State and identify below the percent (two decimal places, e.g. 8.33%) incremental rate of return(s) you used in your reasoning.

Info Type

Project A

Project B

Project C

Initial Cost , $

5,650

8,875

7,500

Benefits/ Year , $

1,475

2,518

2,133

Rate of return

9.59%

12.91%

13.01%

Life in Years

5

5

5

Answer (best/why):                                           

Answers (Incremental IRRs):   

Info Type

Project A

Project B

Project C

Initial Cost , $

5,650

8,875

7,500

Benefits/ Year , $

1,475

2,518

2,133

Rate of return

9.59%

12.91%

13.01%

Life in Years

5

5

5

Explanation / Answer

You can compute IRR or incremental IRR in excel as below

For A, RATE(5, 1475, -5650,0) returns 9.59%

Similarly for others

Given MARR is 10%

Project A is out because IRR is 9.59%; it is so because NPV will be negative at 10%.

Now between project B and C, crossover rate is 12.38%

For r < 12.38%, project B is better because of higher NPV at this rate.

For 12.38% < r < 13.01, Project C is better because of higher NPV at this rate.

Therefore, at specific rate such as 10%, B is better.

A B C B - A B - C C - A CF0 -5,650 -8,875 -7,500 -3,225 -1,375 -1,850 CF1-5 1,475 2,518 2,133 1,043 385 658 IRR 9.59% 12.91% 13.01% 18.50% 12.38% 22.86%

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