If the four projects listed below are mutually exclusive, determine the followin

Question

If the four projects listed below are mutually exclusive, determine the following: Which project should be selected if MARR equals 15% and a rate of return approach is used? Which project should be selected if MARR equals 15% and the NPV criterion is used? HINT It is first necessary to determine how to calculate rate of return and NPV with an infinite life. Project Capital investment, $ 40,000 75,000 80,000 90,000 Annual cash flow, $ 10,000 12,000 14,000 15,000 Life, years infinity infinity infinity infinity

Explanation / Answer

a) Rate of return approach: Project 1: -40000 + 10000/r = 0 => r = 0.25 Project 2: -75000 + 12000/r = 0 => r = 0.16 Project 3: -80000 + 14000/r = 0 => r = 0.175 Project 4: -90000 + 15000/r = 0 => r = 0.167 Choose Project 1 using the rate of return approach. b) NPV criterion: Project 1: -40000 + 10000/0.15 = 26667 Project 2: -75000 + 12000/0.15 = 5000 Project 3: -80000 + 14000/0.15 = 13333 Project 4: -90000 + 15000//0.15 = 10000 Project 1 has the highest NPV and should be chosen.

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