Question

Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are given below. The study period is 30 years and the​ firm's MARR is 10​% per year. Assume repeatability and reinvestment of positive cash balances at 10​% per year.

a. What is the simple payback period for Alternative​ 1?

b. What is the annual worth of Alternative​ 2?

c. What is the IRR of the incremental cash flows of Alternative 2 compared to Alternative​ 1?

d. Which alternative should be selected​?

Alt. 1   Alt. 2   Alt. 3
Capital Investment -30,000   -60,000   -40,000
Annual Costs -14,000   -34,000   -27,000
Annual Revenues 27,000   55,500   36,000
Market Value at End of Useful Life   9,000   9,000   9,000
Useful Life, years 5 5 6
IRR 36.5%   25.6%   13.2%

Answer 1

a	Payback Alt 1	2.31
b	NPV of Alt 2	67367.83
	Annual worth of Alt 2	$7,146.33
c	IRR of incremental cash flow	12.86%
d	NPV of Alt 1	61842.94
	NPV of Alt 2	67367.83
	NPV of Alt 3	9258.84

Select Alt 2 since it has the highest NPV.

Cash flows are as below

Year	Alt 1	Cumulative CF	Alt 2	Alt 3	IncrementalCF- 2/1
0	-30000	-30000	-60000	-40000	-30000
1	13000	-17000	21500	9000	8500
2	13000	-4000	21500	9000	8500
3	13000	9000	21500	9000	8500
4	13000	22000	21500	9000	8500
5	-8000	14000	-29500	9000	-21500
6	13000	27000	21500	-22000	8500
7	13000	40000	21500	9000	8500
8	13000	53000	21500	9000	8500
9	13000	66000	21500	9000	8500
10	-8000	58000	-29500	9000	-21500
11	13000	71000	21500	9000	8500
12	13000	84000	21500	-22000	8500
13	13000	97000	21500	9000	8500
14	13000	110000	21500	9000	8500
15	-8000	102000	-29500	9000	-21500
16	13000	115000	21500	9000	8500
17	13000	128000	21500	9000	8500
18	13000	141000	21500	-22000	8500
19	13000	154000	21500	9000	8500
20	-8000	146000	-29500	9000	-21500
21	13000	159000	21500	9000	8500
22	13000	172000	21500	9000	8500
23	13000	185000	21500	9000	8500
24	13000	198000	21500	-22000	8500
25	-8000	190000	-29500	9000	-21500
26	13000	203000	21500	9000	8500
27	13000	216000	21500	9000	8500
28	13000	229000	21500	9000	8500
29	13000	242000	21500	9000	8500
30	22000	264000	30500	18000	8500

WORKINGS