Question

4. After checking the feasibility of each alternative below, compare them using the Incremental IRR method to decide which one is best. MARR=10%. Suggestion: Use the NEUA-0 defintion of the IRR. Alt А Cosntruction cost s 50000 75000 95000 Annual benefits S/yr | Life yrs 15000 18000 20000

Answer 1

			Year	Cashflow	PV factor 10% [1/(1+r)]^n	PV
Aternative A			0	(50,000.00)	1.000	(50,000.00)
Construction cost	50,000.00		1	15,000.00	0.909	13,636.36
Annual benefit	15,000.00		2	15,000.00	0.826	12,396.69
Life	5		3	15,000.00	0.751	11,269.72
Total PV factor 10%	3.791		4	15,000.00	0.683	10,245.20
			5	15,000.00	0.621	9,313.82
			Total		3.791	6,861.80
					NPV of project=	6,861.80
					Total PV factor 10%=	3.791
					AW=	1,810.13

			Year	Cashflow	PV factor 10% [1/(1+r)]^n	PV
Aternative B			0	(75,000.00)	1.000	(75,000.00)
Construction cost	75,000.00		1	18,000.00	0.909	16,363.64
Annual benefit	18,000.00		2	18,000.00	0.826	14,876.03
Life	6		3	18,000.00	0.751	13,523.67
Total PV factor 10%	4.355		4	18,000.00	0.683	12,294.24
			5	18,000.00	0.621	11,176.58
			6	18,000.00	0.564	10,160.53
			Total		4.355	3,394.69
					NPV of project=	3,394.69
					Total PV factor 10%=	4.355
					AW=	779.45

			Year	Cashflow	PV factor 10% [1/(1+r)]^n	PV
Aternative C			0	(95,000.00)	1.000	(95,000.00)
Construction cost	95,000.00		1	20,000.00	0.909	18,181.82
Annual benefit	20,000.00		2	20,000.00	0.826	16,528.93
Life	7		3	20,000.00	0.751	15,026.30
Total PV factor 10%	4.868		4	20,000.00	0.683	13,660.27
			5	20,000.00	0.621	12,418.43
			6	20,000.00	0.564	11,289.48
			7	20,000.00	0.513	10,263.16
			Total		4.868	2,368.38
					NPV of project=	2,368.38
					Total PV factor 10%=	4.868
					AW=	486.48

IRR Aternative A
Year	Cashflow	PV factor 15.24% [1/(1+r)]^n	PV
0	(50,000.00)	1.000	(50,000.00)
1	15,000.00	0.868	13,016.54
2	15,000.00	0.753	11,295.35
3	15,000.00	0.653	9,801.76
4	15,000.00	0.567	8,505.67
5	15,000.00	0.492	7,380.96
NPV of project			(0.00)

IRR Aternative B
Year	Cashflow	PV factor 11.53% [1/(1+r)]^n	PV
0	(75,000.00)	1.000	(75,000.00)
1	18,000.00	0.897	16,139.08
2	18,000.00	0.804	14,470.56
3	18,000.00	0.721	12,974.53
4	18,000.00	0.646	11,633.17
5	18,000.00	0.579	10,430.48
6	18,000.00	0.520	9,352.13
NPV of project			0.00

IRR Aternative C
Year	Cashflow	PV factor 10.75% [1/(1+r)]^n	PV
0	(95,000.00)	1.000	(95,000.00)
1	20,000.00	0.903	18,058.15
2	20,000.00	0.815	16,304.84
3	20,000.00	0.736	14,721.77
4	20,000.00	0.665	13,292.40
5	20,000.00	0.600	12,001.81
6	20,000.00	0.542	10,836.52
7	20,000.00	0.489	9,784.38
NPV of project			(0.00)

Alternative	NPV	AW	IRR
A	6,861.80	1,810.13	15.24%
B	3,394.69	779.45	11.53%
C	2,368.38	486.48	10.75%
Since alternative A has better values than B and C considering NPV , AW and IRR, Project A should be selected