6-12. The following cash flow estimates have been deve alternatives. (6.4) loped

Question

6-12. The following cash flow estimates have been deve alternatives. (6.4) loped for two mutually exclusive investment EOY Alternative 1 Alternative2 $10,000 $4,000 $2,000 $%2,000 $%2,000 $7,000 $12,000 $5,000 $%2,000 $%2,000 $2,000 $5,500 2 3 4 X a. Find the internal rate of return on the incremental cash flow (A2-A1) b. Calculate the PW on total investment for each alternative for a MARR of 16% and select the best alternative. c. Calculate the PW on incremental investment for each alternative for a MARR of 16% and select the best alternative.

Explanation / Answer

NPV of ALternative 1=10000+4000/1.16+2000/1.16^2+2000/1.16^3+2000/1.16^4+7000/1.16^5
=20653.29
NPV of Alternative 2=12000+5000/1.16+2000/1.16^2+2000/1.16^3+2000/1.16^4+5500/1.16^5
=22801.19

Incremental 2-1's NPV=2000+1000/(1+r)+0/(1+r)^2+0/(1+r)^3+0/(1+r)^4-1500/(1+r)^5
=2000+1000/(1+16%)-1500/(1+16%)^5
=2147.899

IRR would be the rate at which NPV=0
Hence,
0=-2000+1000/(1+r)+0/(1+r)^2+0/(1+r)^3+0/(1+r)^4-1500/(1+r)^5
=>0=2000+1000/(1+r)-1500/(1+r)^5
=>r=-13.85%

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