Consider the following two mutually exclusive alternatives for reclaiming a dete
ID: 2735425 • Letter: C
Question
Consider the following two mutually exclusive alternatives for reclaiming a deteriorating inner-city neighborhood (one of them must be chosen). Notice that the IRR for both alternatives is 27.20%
a. If MARR is 12% per year, which alternative is better?
b. What is the IRR on the incremental cash flow [i.e. (Y-X)] ?
c. If the MARR is 27.5% per year, which alternative is better?
d. What is the simple payback period for each alternative?
e. Which alternative would you recommend?
EOY
X
Y
0
-$95,000
-$95,000
1
$50,000
$0
2
$49,000
$0
3
$52,290
$195,517
IRR
27.20%
27.20%
EOY
X
Y
0
-$95,000
-$95,000
1
$50,000
$0
2
$49,000
$0
3
$52,290
$195,517
IRR
27.20%
27.20%
Explanation / Answer
Answer:a
FW(12)X= -95000(F/P, 12%, 3) +50000(F/P, 12%, 2) +49000 (F/P, 12%, 1) + 52290
= -133475+62700+54880+52290
=36395
FW(12)Y = -95000(F/P, 12%, 3) + 195517
=62042
Alternative Y is better.
Answer:b
Answer:c
FW(27.5)X= -95000(F/P, 27.5%, 3) +50000(F/P, 27.5%, 2) +49000 (F/P, 27.5%, 1) + 52290
= -196897+81280+62475+52290
=-852
FW(27.5)Y = -95000(F/P, 27.5%, 3) + 195517
=-1380
Alternative X is better.
Answer:d Simple Payback period for X is 2 years and for alternative Y is 3 years.
EOY X Y Incremental Cash Flow 0 ($95,000) ($95,000) $0 1 $50,000 $0 ($50,000) 2 $49,000 $0 ($49,000) 3 $52,290 $195,517 $143,227 IRR 27.20%