A manufacturing firm is considering the mutually exclusive a

A manufacturing firm is considering the mutually exclusive alternatives given in the table below. Determine which project is a better choice at a MARR 15% based on the IRR criterion. Net Cash Flow Project A2 $5,000 3,600 3,200 n Project A1 $4,000 2,600 2,800 The IRR on incremental investment is | %. (Round to one decimal place.)

Solution

ANS 30.6%

Year	PROJECT A1	PROJECT A2		INCREMENTAL Project Cash Flows (i)	DF@ 15% (ii)	PV of Project A ( (i) * (ii) )	DF@ 35% (ii)	PV of Project A ( (i) * (ii) )
0	-4000	-5000		-1000	1	(1,000.00)	1	(1,000.00)
1	2600	3600		1000	0.870	869.57	0.741	740.74
2	2800	3200		400	0.756	302.46	0.549	219.48
				CASH INFLOW	172.02	NPV	(39.78)
			IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
				15% +172.02 / (172.02+39.78)*20%
				30.6%