Question

The following data have been estimated for two mutually exclusive investment alternatives, A and B. Incremental ROR analysis was perform to select more desirable alternative. If MARR = 12%, the value of incremental cash flow for year 3 is:

	A	B
Capital Investment	-8000	-13000
Annual Cash Flow	-3500	-1600
Salvage Value	0	2,000
Useful life	5	5

-$1900

+$1900

-$3,500

+$3,500

Answer 1

Option (4).

Monthly net benefit (NB) = Revenue - Operating cost + Salvage (sale) value.

Rate of return (ROR) of NB is computed using Excel IRR function.

Month	Revenue	Cost	NAB
0		37,900	-37,900
1	7,500	5,000	2,500
2	7,500	5,000	2,500
3	7,500	5,000	2,500
4	7,500	5,000	2,500
5	7,500	5,000	2,500
6	7,500	5,000	2,500
7	7,500	5,000	2,500
8	7,500	5,000	2,500
9	7,500	5,000	2,500
10	7,500	5,000	2,500
11	7,500	5,000	2,500
12	7,500	5,000	2,500
13	7,500	5,000	2,500
14	7,500	5,000	2,500
15	7,500	5,000	2,500
16	7,500	5,000	2,500
17	7,500	5,000	2,500
18	7,500	5,000	2,500
19	7,500	5,000	2,500
20	7,500	5,000	2,500
21	7,500	5,000	2,500
22	7,500	5,000	2,500
23	7,500	5,000	2,500
24	18,500	5,000	13,500
		ROR of NB =	5.00%