ISE2014_Class16

# ISE2014_Class16 - Class 16 Incremental IRR and Unequal...

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Click to edit Master subtitle style Class 16 – Incremental IRR and Unequal Lives ISE 2014 Fall 2010

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Your Methods PW Method FW Method AW Method IRR Method
Today’s Class We’ll cover incremental IRR Method We’ll define two assumptions which allow us to compare unequal lives We’ll go over 2 methods for handling unequal lives

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Incremental IRR Method Last class we learned to use incremental analysis with PW, AW, and FW Methods The concept is going to be the same Order options by initial investment Include do nothing if appropriate Perform pair-wise comparisons This time we’re going to do IRR Method on
Incremental IRR Method A local company is looking to add a delivery service for its customers It’ll use existing staff for the deliveries, so the only cost will be the vehicle itself The company has come up with three choices for the vehicle, each providing more capacity for deliveries The company’s MARR is 10%

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Incremental IRR Method Using Incremental IRR, which is the best MARR = 10% Truck A Truck B Truck C Initial Investment \$15,000 \$25,000 \$50,000 Yearly Returns \$2,500 \$4,000 \$9,000 Salvage Value \$0 \$0 \$0 Useful Life 10 10 10 IRR 10.56% 9.61% 12.41%
Incremental IRR Method The IRR values provided are for each individual option As we learned last class, we can’t use this to compare options However, we can use it to eliminate bad options Truck B has an IRR below the MARR, so we can throw it away immediately

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ISE2014_Class16 - Class 16 Incremental IRR and Unequal...

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