Question2 5 pts If MARR7 which alternative should be selecte

Question2 5 pts If MARR=7%, which alternative should be selected? Year 0 -18,000 7,000 7,000 24,500 9,500 9,500 9,500 2 Alt. B Alt. A Either Alt. A or B

Solution

Both projects can be accepted as IRR of both the projects is greater than MARR and NPV of both Projects is positive.

Hence option “Either Alt. A or B” is correct answer.

Explanation:

Computation of IRR and NPV of both the projects:

Year

Cash Flow

(C_A)

Cash Flow (C_B)

PV Factor calculation

PV Factor

(F)

PV_A (=C_A x F)

PV_B (=C_B x F)

0

($18,000)

($24,500)

1/(1+7%)^0

1

($18,000.00)

($24,500)

1

$7,000

$9,500

1/(1+7%)^1

0.934579439

$6,542.06

$8,879

2

$7,000

$9,500

1/(1+7%)^2

0.873438728

$6,114.07

$8,298

3

$7,000

$9,500

1/(1+7%)^3

0.816297877

$5,714.09

$7,755

IRR

8.12%

7.96%

NPV

$370.21

$431.00

Sum of all PV is NPV and Excel formula for IRR is:

“=IRR(Cell no: Cell no)”

Year	Cash Flow (CA)	Cash Flow (CB)	PV Factor calculation	PV Factor (F)	PVA (=CA x F)	PVB (=CB x F)
0	($18,000)	($24,500)	1/(1+7%)^0	1	($18,000.00)	($24,500)
1	$7,000	$9,500	1/(1+7%)^1	0.934579439	$6,542.06	$8,879
2	$7,000	$9,500	1/(1+7%)^2	0.873438728	$6,114.07	$8,298
3	$7,000	$9,500	1/(1+7%)^3	0.816297877	$5,714.09	$7,755
IRR	8.12%	7.96%		NPV	$370.21	$431.00