wiversity of Missouri CE 3010 Decision Problem 3: (20ps) Three mutually exclusiv
ID: 2803057 • Letter: W
Question
wiversity of Missouri CE 3010 Decision Problem 3: (20ps) Three mutually exclusive alternatives are being considered (A, B, and C). The net present interest rate is shown in Figure (3). $5,000.00 T $4,000.00 $3,000.00 It $2,000.00 -B-B $1,000.00 ($1,000.00) ($2,000.00) 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Interest Rate ( Figure 3: The net present worth (NPW, million dollars) versus the interest rate () By observation, what is the approximate value of the internal rate of return for each alternative? Answer I. Alternative A, IRR= Alternative B, IRR Alternative C, IRR- By observation, what is the acceptable range of interest rate for each alternative? Answer II. Alternative A, Accepted range of(i) Alternative B, Accepted range of 0 Alternative C, Accepted range of (@) If the minimum attractive rate of return, MARR, is 10%, which alternative(s) should be chosen among A, B, and C? Answer: 111.Explanation / Answer
Answer I.
The approximate value of the internal rate of return for each alternative is:
Alternative A, IRR: 13%
Alternative B, IRR: 19%
Alternative C, IRR: 25%
IRR is the rate at which NPV of the project is zero. And thus the interest rate more than IRR can lead to negative NPV and thus the acceptable range of interest is also the IRR for the project
Answer II.
The Acceptable rate of interest ratefor each alternative is:
Alternative A, Acceptable range of (i): 0% to 13%
Alternative B, Acceptable range of (i): 0% to 19%
Alternative C, Acceptable range of (i): 0% to 25%
Answer III.
If the minimum attractive rateof return MARR is 10%,
We should select Alternative B with the NPW of $1000 whereas the NPW of Alterntaive A and C at around $750
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