I need some assistance with a similar problem to the one below. I have to use th
ID: 2668857 • Letter: I
Question
I need some assistance with a similar problem to the one below. I have to use the internal rate of return (IRR) to select the best option with a MARR of at least 10 percent. Number of years Nper is 5.
Option A
Initial investment = 13,000.00
Annual cost = 4,900.00
Annual Benefit = 7,900.00
Net Salvage Value 850.00
Option 2
Initial investment = 16,000.00
Annual cost = 4,300.00
Annual Benefit = 8,500.00
Net Salvage Value 1500.00
If someone could help me set this problem up, I would greatly appreciate.
Explanation / Answer
Option 2 is much better ($852.69 vs -$1,099.86) or 12% IRR vs 7% IRR
10% interest for 5 years, I assume we sell or salvage the good at the same time we receive the last year's annual benefit.
Option A
Initial investment = 13,000.00
Annual cost = 4,900.00
Annual Benefit = 7,900.00
Net Salvage Value 850.00
PV = -$13,000 + (7900-4900)/(1.1^1) + (7900-4900)/(1.1^2) +(7900-4900)/(1.1^3) +(7900-4900)/(1.1^4) +(7900-4900)/(1.1^5) + 850/(1.1^5) = -$1,099.86
Option 2
Initial investment = 16,000.00
Annual cost = 4,300.00
Annual Benefit = 8,500.00
Net Salvage Value 1500.00
Do the same as for option 1, obviously with different numbers, and you get:
$852.6864