Question

Compare two competing, mutually exclusive new machines that have only cost data given and tell which of the following statements is true regarding the present worth of the incremental investment at your investment interest rate.

a.) If it is greater than zero, we chose the alternative with the largest initial investment expense.

b.) The internal rate of return will always be equal to the investment rate of return.

c.) Neither machine is chosen if there is only cost data and the present worth is less than zero.

d.) If it is less then zero, we chose the alternative with the smallest initial investment expense.

Can you please give an explanation for the answer. Thank you.

Answer #1

Mutually exclusive machines cannot go hand in hand and the occurrence of one will suspend the other one. In this case, both the machines can't be chosen and the incremental investment considering the present worth of the machines is that none of the machines will be chosen if the worth of the machines is less than zero. If the worth of the machines is less than zero, then the investment will not be worthy.

If the interest rate is greater than zero, the alternative with less initial investment expense should be chosen.

The internal rate of return will be higher or lesser than the investment rate of return because the initial rate of return considers only the initial value and final value.

If the interest rate is less than zero, then it is better to choose the alternative with a high initial investment expense.

**Answer: Option C**

You are evaluating 2 machines the investment of 2 mutually
exclusive machines. Each machine has an eight year life and you
plan to keep whichever machine you pick for the full 8 years. The
firm's MARR is 10%. The cash flows for each machine are summarized
in the following table:
A
B
Initial Cost
$4000
$3000
Annual Benefit
$800
$600
Annual Cost
$100
$50
Salvage Value
$1500
$1000
Each investment has an IRR greater than the 10% MARR. Using
Incremental...

You are evaluating 2 machines the investment of 2 mutually
exclusive machines. Each machine has an eight year life and you
plan to keep whichever machine you pick for the full 8 years. The
firm's MARR is 10%. The cash flows for each machine are summarized
in the following table:
A
B
Initial Cost
$4000
$3000
Annual Benefit
$800
$600
Annual Cost
$100
$50
Salvage Value
$1500
$1000
Each investment has an IRR greater than the 10% MARR. Using
Incremental...

You are evaluating 2 machines the investment of 2 mutually
exclusive machines. Each machine has an eight year life and you
plan to keep whichever machine you pick for the full 8 years. The
firm's MARR is 10%. The cash flows for each machine are summarized
in the following table: A B Initial Cost $4000 $3000 Annual Benefit
$800 $600 Annual Cost $100 $50 Salvage Value $1500 $1000 Each
investment has an IRR greater than the 10% MARR. Using Incremental...

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

When the mutually exclusive alternatives under consideration
have only disbursements (service alternatives), the do-nothing
alternative must be included so that a rate of return analysis can
be conducted on the incremental cash flow.
Question 1 options:
True
False

The firm must choose between two mutually exclusive
investments each requiring initial outlay of $8000 with the
following net cash flows:
Year Investment A Investment B
1 3200 4800
2 2400 3200
3 4800 2400
The firm’s required rate of return is 14%
Calculate the payback period and the net present value
method for each investment.
Which (or both) investment should be
chosen?

Two mutually exclusive alternatives are being considered. Both
have lives of 5 years. Alternative A has a first cost of $2500 and
annual benefits of $746. Alternative B costs $6000 and has annual
benefits of
$1664. The minimum attractive rate of return is 8%.
(a) What is the incremental rate of return between the two
alternatives?
(b) Which alternative should be selected?
Please explain your response a step by step.

Two mutually exclusive projects have an initial cost of $60,000
each. Project A produces cash inflows of $30,000, $37,000, and
$20,000 for Years 1 through 3, respectively. Project B produces
cash inflows of $80,000 in Year 2 only. The required rate of return
is 10 percent for Project A and 11 percent for Project B. Which
project(s) should be accepted and why?
Project A, because it has the higher required rate of
return.
Project A, because it has the larger...

No Excel.
Two mutually exclusive alternatives are bring considered: A and
B. Both alternatives cost $1,200 at the present. However, the
pattern of revenue from them is different. Alternative A has the
potential to bring more revenues later in the project life. The
expected revenues of alternative A are: $350, $500, and $850 by the
ends of years one to three, respectively. Alternative B promises
more immediate cash inflow which is expected to diminish with time:
$750, $300, and $100...

6. Understanding the NPV profile If projects are mutually
exclusive, only one project can be chosen. The internal rate of
return (IRR) and the net present value (NPV) methods will not
always choose the same project. If the crossover rate on the NPV
profile is below the horizontal axis, the methods will agree.
Projects Y and Z are mutually exclusive projects. Their cash flows
and NPV profiles are shown as follows. Year Project Y Project Z 0
–$1,500 –$1,500 1...

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