Question

The estimated capital investment and the annual expenses for three alternative designs of a diesel powered air compressor are shown, as well as the estimated market value for each design at the end of the common 5 year useful life.  Each of the design provides the same level of service. Given a MARR of 8% per year, determine the preferred alternative using the Incremental Rate of Return (IRR) method. You will receive NO credit if you do not use the IRR method in this question.

	D1	D2	D3
Initial Cost	-100,000	-152,200	-149,600
Annual Expenses	-29,000	-12,000	-17,900
Useful Life	5	5	5
Salvage Value	10,000	25,600	14,000

Answer 1

ANSWER

As per IRR method select D2.

Only D2 has an IRR as there is a sign change in the cash flow.

There are situations where there is no IRR, as well. For example, if all cash flows have the same sign (i.e. the project never makes a profit), then no discount rate will generate zero NPV.

The problem is solved in excel by using IRR function.

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