Lecture6

3 13000 4225 114 different from pw approach since

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Unformatted text preview: ,000 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 ∆(B2-B1) -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 ∆(B3-B1) -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.

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