Question

In: Finance

If we are given the following investment opportunities, which is preferred at a MARR of 10%?...

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

Solutions

Expert Solution

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.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Consider the investment projects given in Table P7.19. Assume that MARR = 13% in the following...
Consider the investment projects given in Table P7.19. Assume that MARR = 13% in the following questions: (a) Identify the i*('s) for each investment. If the project has more than one i*, identify all of them. (b) Which project(s) is(are) a mixed investment? (c) Compute the IRR for each project. (d) Determine the acceptability of each project. Table P.719 n Project 1 Project 2 Project 3 0 -$8,500 -$5,000 -$1,500 1 10,000 10,000 6,000 2 10,000 30,000 -6,000 3 0...
Q3- For two mutually exclusive projects, the cash flows are given. If MARR is 10%, which...
Q3- For two mutually exclusive projects, the cash flows are given. If MARR is 10%, which project should we select? please show all steps and all work N(year) P1 P2 0 -$3000 -$12000 1 $1350 4200 2 1800 6225 3 1500 6330
Use the rate of return values of the equipment alternatives given in the following table to assist your manager to decide, if any, which one to purchase given that the MARR is 10%.
Use the rate of return values of the equipment alternatives given in the following table to assist your manager to decide, if any, which one to purchase given that the MARR is 10%.
The MARR value is 10%                                     Machine A  &
The MARR value is 10%                                     Machine A         Machine B Initial Cost ($)    66,000    85,000 Annual MaintenanceCost ($)      12,000               13,000 Annual Income ($) 30,000               34,000 Salvage ($)                               6,000                6,000 Life (years)                           5                       5 What is the Capital Recovery for Machine A? What is the Annual Worth of Machine A? What is the Annual Worth of Machine B? Which machine would you recommend? Life (years) 5 5 What is the Capital Recovery for Machine A? What is the...
To recover your investment and earn a MARR of 10% per year, how long will you...
To recover your investment and earn a MARR of 10% per year, how long will you have to own a business that costs $230,000 to setup, generates $50,000 per year in income and has $15,000 per year in expenses ?
Carmen, Inc., which has a hurdle rate of 10%, is considering three different independent investment opportunities....
Carmen, Inc., which has a hurdle rate of 10%, is considering three different independent investment opportunities. Each project has a five-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.) Project A Project B Project C Annual cash flows $ 105,651 $ 56,875 $ 103,261 Initial investment 178,000...
Consider three alternatives, each with a 10-year useful life. If the MARR is 10%, which alternative...
Consider three alternatives, each with a 10-year useful life. If the MARR is 10%, which alternative should be selected? Solve the problem by benefit-cost analysis. Alt Alt B Alt C Cost $800 $300 $150 Uniform Annual Benefit $142 $60 $33.50
A contractor was doing the 10-year planning for a construction business, which uses a MARR of...
A contractor was doing the 10-year planning for a construction business, which uses a MARR of 15% per year. The contractor anticipates income of $150,000 per year for years 1-5, and income of $200,000 per year for years 6-10. Draw the cash flow diagram. What is the future value (in year 10) of the income? (show steps and calculations)
A contractor was doing the 10-year planning for a construction business, which uses a MARR of...
A contractor was doing the 10-year planning for a construction business, which uses a MARR of 15% per year. The contractor anticipates income of $150,000 per year for years 1-5, and income of $200,000 per year for years 6-10. Draw the cash flow diagram. What is the future value (in year 10) of the income?
Which of the following investment opportunities has the lowest effective annual return? Select one: a. An...
Which of the following investment opportunities has the lowest effective annual return? Select one: a. An investment, which pays 7% nominal interest rate with annual compounding b. An investment, which pays 7% nominal interest rate with monthly compounding c. An investment, which pays 6% nominal interest rate with daily compounding d. There is not enough information to compute effective annual return (EAR)
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT