Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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![**Title: Evaluation of Design Alternatives Using IRR Method**
The estimated negative cash flows for three design alternatives are shown below. The Minimum Attractive Rate of Return (MARR) is 12% per year, and the study period is six years. The task is to determine which alternative is best based on the Internal Rate of Return (IRR) method. "Doing nothing" is not an option.
**Cash Flow Details for Alternatives:**
| Parameter | EOY | Alternative A | Alternative B | Alternative C |
|-----------------------|-----|---------------|---------------|---------------|
| Capital Investment | 0 | $83,400 | $63,000 | $69,600 |
| Annual Expenses | 1-6 | $8,600 | $13,100 | $11,350 |
**Decision-Making Question:**
Which alternative would you choose as a base one? Choose the correct answer below:
- [ ] Alternative A
- [x] Alternative B
- [ ] Alternative C
**Analysis Task:**
Analyze the difference between the base alternative and the second-choice alternative.
**Calculation:**
- **IRR (Alternative B - Alternative C)**: ___ %
*Note: Round to two decimal places.*
This exercise guides learners in evaluating potential investment options using the IRR method, helping them apply theoretical knowledge in practical scenarios effectively.](https://content.bartleby.com/qna-images/question/a6ce8484-6cf8-4da3-a201-a719d3e6a605/32381cd9-a671-47c4-84b1-2fe0ad8160d0/3jhvkao_processed.jpeg)
Transcribed Image Text:**Title: Evaluation of Design Alternatives Using IRR Method**
The estimated negative cash flows for three design alternatives are shown below. The Minimum Attractive Rate of Return (MARR) is 12% per year, and the study period is six years. The task is to determine which alternative is best based on the Internal Rate of Return (IRR) method. "Doing nothing" is not an option.
**Cash Flow Details for Alternatives:**
| Parameter | EOY | Alternative A | Alternative B | Alternative C |
|-----------------------|-----|---------------|---------------|---------------|
| Capital Investment | 0 | $83,400 | $63,000 | $69,600 |
| Annual Expenses | 1-6 | $8,600 | $13,100 | $11,350 |
**Decision-Making Question:**
Which alternative would you choose as a base one? Choose the correct answer below:
- [ ] Alternative A
- [x] Alternative B
- [ ] Alternative C
**Analysis Task:**
Analyze the difference between the base alternative and the second-choice alternative.
**Calculation:**
- **IRR (Alternative B - Alternative C)**: ___ %
*Note: Round to two decimal places.*
This exercise guides learners in evaluating potential investment options using the IRR method, helping them apply theoretical knowledge in practical scenarios effectively.
Expert Solution
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Step 1: Introduction:
The internal rate of return(IRR) is used to evaluate the profitability of an investment project. It is a percentage that shows the discount rate at which the NPV of future cash flows equals zero. It is a useful tool for comparing the different investment opportunities since it allows decision-makers to evaluate projects and select the ones with the higher IRR.
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