In: Accounting
Determine the best alternative among the options in the table below if the MARR is 6%.
Option | A | B | C |
Initial cost | $2500 | $4000 | $5000 |
Annual net benefits | $410 | $639 | $700 |
n= 20 years. | |||
NPV= | |||
IRR= | |||
NPV | |||
i | A | B | C |
0% | |||
1% | |||
2% | |||
3% | |||
4% | |||
5% | |||
6% | |||
7% | |||
8% | |||
9% | |||
10% | |||
11% | |||
12% | |||
13% | |||
14% | |||
15% | |||
16% | |||
17% | |||
18% | |||
19% | |||
20% | |||
21% | |||
22% | |||
23% | |||
24% | |||
25% |
a) Using Excel, construct a choice table for interest rates from 0%
to 25% showing the NPV of each option for each interest rate using
the NPV function. Based on the table, state the range of interest
rates over which each option should be chosen.
b) Using Excel, plot the values for the three options for a rate
interest ranging from 1% to 25%. This table will plot the NPV of
each option as a function of interest rate. On the plot, label the
internal rate of return for each option. Interpret the results of
the graph.
c) In Excel, use the IRR function that you have to perform a rate
of return analysis on the three options.The MARR=6%. Show the
calculated values of each internal rate of return, expressed to 2
decimal places. Explain any decision to consider or reject an
option.
Option | A | B | C | ||
Initial Cost | 2500 | 4000 | 5000 | ||
Annual net benefit | 410 | 639 | 700 | ||
NPV calculation | |||||
Rate | A | B | C | Rate | |
0% | $5,700.00 | $8,780.00 | $9,000.00 | 0% | |
1% | $4,850.17 | $7,456.54 | $7,556.32 | 1% | |
2% | $4,121.65 | $6,322.12 | $6,319.61 | 2% | |
3% | $3,494.92 | $5,346.32 | $5,256.54 | 3% | |
4% | $2,953.88 | $4,504.06 | $4,339.64 | 4% | |
5% | $2,485.24 | $3,774.62 | $3,546.24 | 5% | |
6% | $2,077.99 | $3,140.83 | $2,857.50 | 6% | |
7% | $1,722.94 | $2,588.39 | $2,257.77 | 7% | |
8% | $1,412.44 | $2,105.37 | $1,733.98 | 8% | |
9% | $1,140.10 | $1,681.78 | $1,275.21 | 9% | |
10% | $900.51 | $1,309.24 | $872.27 | 10% | |
11% | $689.16 | $980.69 | $517.41 | 11% | |
12% | $502.21 | $690.16 | $204.12 | 12% | |
13% | $336.41 | $432.58 | ($73.16) | 13% | |
14% | $189.02 | $203.67 | ($319.13) | 14% | |
15% | $57.67 | ($0.25) | ($537.80) | 15% | |
16% | ($59.63) | ($182.30) | ($732.60) | 16% | |
17% | ($164.63) | ($345.18) | ($906.46) | 17% | |
18% | ($258.79) | ($491.18) | ($1,061.93) | 18% | |
19% | ($343.40) | ($622.31) | ($1,201.17) | 19% | |
20% | ($419.56) | ($740.28) | ($1,326.08) | 20% | |
21% | ($488.23) | ($846.59) | ($1,438.28) | 21% | |
22% | ($550.24) | ($942.53) | ($1,539.19) | 22% | |
23% | ($606.32) | ($1,029.24) | ($1,630.06) | 23% | |
24% | ($657.09) | ($1,107.70) | ($1,711.95) | 24% | |
25% | ($703.13) | ($1,178.77) | ($1,785.83) | 25% | |
Range between each opetion to be choosen | |||||
A | B | C | |||
0% to 15% | 0% to 14% | 0% to 12% |
IRR calculation | |||||
15% | 15% | 13% | |||
Since MARR is 6% we can accept all the project |