Question

If we are given the following investment opportunities, which is preferred at a MARR of 10%? Be sure to use both IRR and incremental analysis.

Alternative	Investment A	Investment B	Investment C	Investment D
Initial Investment	$4,000	$15,000	$5,000	$19,000
Year 1 cash flow	0	0	0	0
Year 2 cash flow	$9,500	$22,100	$4,100	$25,700

Answer 1

We use the excel function IRR to compute IRR

IRR = IRR(All cash-flows)

Year	Investment A	Investment B	Investment C	Investment D
0	-4000	-15000	-5000	-19000
1	0	0	0	0
2	9500	22100	4100	25700
IRR	54.11%	21.38%	-9.45%	16.30%

MRR is 10%. Hence, baring Investment C, all the other investments have an IRR greater than MARR and can be considered as a good investment opportunity.

Hence, we do not consider Investment C as an opportunity.

We conduct the incremental analysis between Investment B and Investment A

Year	Investment A	Investment B	Incremental cash-flows (B-A)
0	-4000	-15000	-11000
1	0	0	0
2	9500	22100	12600
		IRR	7.03%

Since, the IRR< MARR, we do not consider Investment B as a better investment opportunity than Investment A

We conduct the incremental analysis between Investment D and Investment A

Year	Investment A	Investment D	Incremental cash-flows (D-A)
0	-4000	-19000	-15000
1	0	0	0
2	9500	25700	16200
		IRR	3.92%

Since, the IRR< MARR, we do not consider Investment D as a better investment opportunity than Investment A

Hecen, we prefer Investment A over other Investments.