Question

The government of a particular city is considering two mutually exclusive water purification systems for implementation. Doing nothing is not an option. Refer to the data below to determine which system should be selected, when MARR = 12% per year, and

1. Use the AW method
2. Use the PW method
3. Use rate of return method

Alternative	System 1	System 2
Capital Investment	$100,000	$150,000
Annual revenues	$50,000	$70,000
Annual expenses	$22,000	$40,000
Market value at end of useful life	$20,000	$12,000
Useful life (years)	5	10
IRR	16.5%	15.1%

Answer 1

From all the calculation PW, AW and Incremental IRR the Sytem B should be selected.

The excel calculation and formula used are shown below:

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As I have solved a similar question few minutes back therefore I know the IRR of Sytem B can be equal to 15.1% if the salvage value is 0. Therefore, for that solution just remove the salvage value from the last cell of Sytem B cashflow. Thank you.