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22,000
17.3% 73,000
26,225
16.3% 13,000
4,225
11.4% different from PW approach Since IRR∆(B−A) > MARR, the increment is acceptable and B is
better than A.
Observation 1: This result is inconsistent with the IRR ranking,
which says A is better than B!
Observation 2: IRR does not have additivity property,
IRRX +Y = IRRX + IRRY .
Caveat: We cannot base our choice on maximizing IRR
because the investment size of A and B is different!
SEEM5740/ECLT5930 11 Example 6.3: Four mutually exclusive alternatives are
considered. The company determined a study period of 15
years. If the MARR is 10%, which alternative should the
company select? Investment
Annual income
Salvage value
PW(10%) P
200,000
22,000
100,000
8,726 B1
4,000,000
600,000
2,000,000
1,042,460 B2
5,500,000
720,000
2,775,000
590,727 B3
7,500,000
960,000
3,750,000
699,606 Select B1, as it has the largest positive PW. SEEM5740/ECLT5930 12 Incremental analysis for investment alternatives by
IRR: Example 6.3
Step 1. P, B1, B2, B3. (in the order of increasing investment.)
Step 2. IRR of P is 9.3%, so it is unacceptable. IRR of B1 is
13.8%, so B1 is the current best alternative.
Step 3. Compare B2 and B1. Investment
Annual income
Salvage value
IRR ∆(B2B1)
1,550,000
120,000
775,000
5.5% So B1 is better than B2. It is still the current best alternative. SEEM5740/ECLT5930 13 Step 4. Compare B3 and B1. Investment
Annual income
Salvage value
IRR ∆(B3B1)
3,500,000
360,000
1,750,000
8.5% So B1 is better than B3, and remains the current best
alternative.
We have considered all alternatives, therefore stop and select
B1. SEEM5740/ECLT5930 14 Example 6.4: We consider four design alternatives each with a
useful life of 5 years. The MARR is 20%. Increasing capital
investment leads to decreasing annual expenses. Which
design should be selected? Capital Investment
Annual expenses
Salvage value
PW D1
100,000
29,000
10,000
182,709 D2
140,600
16,900
14,000
185,515 D3
148,200
14,800
25,600
182,173 D4
122,000
22,100
14,000
182,466 Select D3, as it has the least negative PW. SEEM5740/ECLT5930 15 Incremental analysis for cost alternatives by...
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This note was uploaded on 03/23/2013 for the course SEEM 5740 taught by Professor Zhou,xiang during the Fall '12 term at CUHK.
 Fall '12
 ZHOU,Xiang

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