22. A regional airport is considering installing a new baggage hanan different v

Question

22. A regional airport is considering installing a new baggage hanan different vendors submitted their bids on the system. The airport. current system. The cash flows that describe each baggage handling respect to the current system are given below. (3 Pts) a new baggage handling system. Two n the system. The airport is to replace its | Year (n) 1- 15 Vendor A Vendor B Vendor B - Vendor A -$500,000 -$600,000 -$100,000 48,170 65,880 17,710 5% 7% 15.73% IRR a. Vendor B is preferred as long as the airport's MARR is less than 15.73% b. Vendor B is preferred as long as the airport's MARR is less than 7% c. Vendor A is preferred as long as the airport's MARR is less than 5% d. Vendor A is preferred if the airport's MARR is greater than 15.73% e. None of the above

Explanation / Answer

Solution:

In the given context, the decision of choosing one of the vendors will depend on two factors:

1. Which Vendor has a Higher IRR among the two?

2. Is the Higher IRR value greater than the Hurdle Rate or MARR of Airport?

So, We see that 7% ( IRR of Vendor B) is greater than 5% ( IRR of Vendor A). Therefore, Vendor B is preferred over Vendor B. But, whether Vendor B should be good enough ? This is decided by comparing the IRR value of Vendor B over Airport's MARR. And, as seen in point 2 above, the IRR of Vendor must be more than the MARR of Airport or in other words, MARR of Airport should be less than IRR of the Vendor.

Thus, for the given problem, Option b - Vendor B is preferred as long as the airport's MARR is less than 7% is the correct answer.

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