Annual costs of 3 different systems are provided below. If the MARR is 8%, which system...

Annual costs of 3 different systems are provided below. If the MARR is 8%, which system is the least costly of the three? Use incremental investment analysis and show all steps.

Year	System A	System B	System C
0	$0	$2,000,000	$4,000,000
1	$9,000,000	$3,800,000	$1,900,000
2	$9,000,000	$3,800,000	$1,900,000
3	$9,000,000	$3,800,000	$1,900,000
4	$9,000,000	$3,800,000	$1,900,000
5	$9,000,000	$3,800,000	$1,900,000
6	$9,000,000	$3,800,000	$1,900,000
7	$9,000,000	$3,800,000	$1,900,000
8	$9,000,000	$3,800,000	$1,900,000

If you use Excel to solve these problems, please provide details of the functions that you used.

Solutions

Expert Solution

MARR = 8%

We need to perform incremental IRR analysis

Using Excel

System Costs			Incremental IRR Analysis
Year	A	B	C	B-A	C-B
0	0	-2000000	-4000000	-2000000	-2000000
1	-9000000	-3800000	-1900000	5200000	1900000
2	-9000000	-3800000	-1900000	5200000	1900000
3	-9000000	-3800000	-1900000	5200000	1900000
4	-9000000	-3800000	-1900000	5200000	1900000
5	-9000000	-3800000	-1900000	5200000	1900000
6	-9000000	-3800000	-1900000	5200000	1900000
7	-9000000	-3800000	-1900000	5200000	1900000
8	-9000000	-3800000	-1900000	5200000	1900000
Incremental IRR				259.99%	94.54%

We compare first A and B since A has the lowest cost, and the second lowest option is B, incremental IRR > MARR so we select B, and reject A

Now we find incremental cash flow between C & B, we find incremental IRR>MARR, so we select C and reject B

Option C should be selected as per Incremental IRR analysis

Showing formula in excel

	System Costs			Incremental IRR Analysis
Year	A	B	C	B-A	C-B
0	0	-2000000	-4000000	=O30-N30	=P30-O30
1	-9000000	-3800000	-1900000	=O31-N31	=P31-O31
2	-9000000	-3800000	-1900000	=O32-N32	=P32-O32
3	-9000000	-3800000	-1900000	=O33-N33	=P33-O33
4	-9000000	-3800000	-1900000	=O34-N34	=P34-O34
5	-9000000	-3800000	-1900000	=O35-N35	=P35-O35
6	-9000000	-3800000	-1900000	=O36-N36	=P36-O36
7	-9000000	-3800000	-1900000	=O37-N37	=P37-O37
8	-9000000	-3800000	-1900000	=O38-N38	=P38-O38
Incremental IRR				=IRR(Q30:Q38)	=IRR(R30:R38)

Rahul Sunny answered 1 year ago

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