Question

A firm must decide which one of the three alternatives below it should select to expand its capacity. The firm wishes a minimum annual profit of 20% of the initial cost of each separable increment of investment. Any money not invested in capacity expansion can be invested (forever) elsewhere for an annual yield of 20% of initial cost. Your reasoning must include the ∆IRR for each Challenger-Defender comparison.

Alternative	Initial Cost	Annual Profit	Profit Rate
A	$100,000	$30,000	30%
B	$280,000	$82,000	29.29%
C	$410,000	$110,000	26.83%

In the table below, list the challengers and defenders and the ∆IRR between them and which one is the winner. I have given the first Challenger and Defender (A –“Do Nothing”).

Challenger	Defender	∆IRR	Winner
A	“Do Nothing”

This cell indicates alternative selected

Answer 1