Question

You have the following investment options as laid out in the table below:

	Project Cash Flow
Year	A	B	C	D	E
0	-$1000	-$1200	-$2000	-$1600	-$1400
1	900	800	950	900	400
2	500	700	950	900	400
3	100	700	950	900	1200
4	50	300	950	900	400

If your MARR is 15%, which of these options should you select? Solve this problem by challenger-defender analysis.

Answer 1

In given question ........... Project - A with least intitial cost and low annual cashflow is the defender. Remaining all projects are compared with project - A as they are challengers trying to replace project - A

B to A : It means that challenger B compared to Defender A. Here the t = 0 cash flow = -200. This is additional cash out flow if B is taken. And annual cash inflow = B - A are savings due to selection of B

Year	Discounting Factor at 15%	B to A	PV(B to A)	C to A	PV (C to A)	D to A	PV(D to A)	E to A	PV (E to A)
0	1	-200	-200	-1000	-1000	-600	-600	-400	-400
1	0.86956522	-100	-86.95652	50	43.478261	0	0	-500	-434.78261
2	0.75614367	200	151.22873	450	340.26465	400	302.45747	-100	-75.614367
3	0.65751623	600	394.50974	850	558.8888	800	526.01299	1100	723.26786
4	0.57175325	250	142.93831	900	514.57792	850	485.99026	350	200.11364
	NPV       =		401.72026		457.2096		714.46071		12.984516

A comparision of above NPV values indicates that Project - D is the best alternative for investment.  

Note

Cash flows of each year from t = 1 to t = 4 are calculated by deducting project - A cash flows. For example C to A

(950 - 900), (950 - 500), ( 950 - 100) and ( 950 - 50)