Question

site The estimated negative cash flows for three design alternatives are shown below. The MARR is 10% per year and the study period is six years. Which alternative is best based on the IRR method? Doing nothing is not an option. Alternative FOY A $80,900 0 $63,000 $70,400 Capital investment Annual expenses 1-6 6,900 11,100 9,150 Which alternative would you choose as a base one? Choose the correct answer below. O A. Alternative B OB. Alternative C OC. Alternative Analyze the difference between the base alternative and the second-choice alternative IRRA V- W-[%. (Round to two decimal places.) Analyze the difference between the current base alternative and the third-choice alternative. IRRA - V)- %. (Round to two decimal places.) Which alternative should be selected? Choose the correct answer below. O A. Alternative B Click to select your answer(s).

Answer 1

Your final answers are towards the end of the solution:

Alternative B has the least capital investment, hence set B as base alternative. Alternative C is next low on capital investment. Hence, C is second choice alternative. We will calculate the incremental cash flows of C - B and find its IRR. Please see the table below. The last row contains IRR. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

BJ Year 1 5 1 B K BL в -80,900 -63,000 -6,900 -11,100 -6,900 -11,100 -6,900 -11,100 -6,900 -11,100 -6,900 -11,100 -6,900 -11,100 BM BN ВО C-B А-С -70,400 -7,400 -10,500 -9,150 1,950 2,250 -9,150 1,950 2,250 -9,150| 1,950 2,250 -9,150 1,950 2,250 -9,150 1,950] 2,250 -9,150 1,950] 2,250 14.90% =IRR(BN6:BN12) '=IRR(Bo6:Bo12) | 6 7.69% 13 IRR 14

Please see the IRR of C - B. It's 14.90% > MARR of 10%. Hence, C should be selected over B and it is the current base alternative. In the last column, calculate the incremental cash flow of A over C, i.e. A - C. It's IRR is 7.69% < MARR of 10%. Hence, choose alternative C over A.

Hence your final answers should be:

Analyze the difference between the base alternative and the second-choice alternative.

IRR Δ(C - B) 14.90%. (Round to two decimal places.)

Analyze the difference between the current base alternative and the third -choice alternative.

IRR Δ(A - C) = 7.69%. (Round to two decimal places.)

Which alternative should be selected?

Option B. Alternative C