Question

Orpheum Productions in Nevada is considering three mutually exclusive alternatives for lighting enhancements to one of its recording studios. Each enhancement will increase revenues by attracting directors who prefer this lighting style. The cash flow details, in thousands of dollars, for these enhancements are shown in the chart below. MARR is 10%/yr. Based on an internal rate of return analysis, which alternative (if any) should be implemented?   End of Year     Light Bar     Sliding Spots     Reflected Beam     0     −$6,000     −$14,000     −$20,000     1      $2,000       $3,500           $0     2      $2,000       $3,500       $2,300     3      $2,000       $3,500       $4,600     4      $2,000       $3,500       $6,900     5      $2,000       $3,500       $9,200     6      $2,000       $3,500      $11,500

Answer 1

IRR for each option using excel IRR function is as follows.

EOY	Light Bar	Sliding Spots	Reflected Beam
0	-6000	-14000	-20000
1	2000	3500	0
2	2000	3500	2300
3	2000	3500	4600
4	2000	3500	6900
5	2000	3500	9200
6	2000	3500	11500
IRR =	24.29%	12.98%	12.67%

Since Light Bar has highest IRR (which is higher than MARR), this is best option.