Lecture6

# 4 step 1 d1 d4 d2 d3 in the order of increasing

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Unformatted text preview: IRR: Example 6.4 Step 1. D1, D4, D2, D3 (in the order of increasing capital investment) Step 2. Choose the ﬁrst alternative, D1, as the current best alternative. Step 3. Compare D4 and D1. Capital Investment Annual savings Salvage value IRR ∆(D4-D1) -22,000 6,900 14,000-10,000=4,000 20.5% Hence D4 is better than D1, and choose D4 as the current best. SEEM5740/ECLT5930 16 Step 4. Compare D2 and D4. IRR∆(D2−D4) = 12.3% < 20%. Increment is not justiﬁed. D4 is still the current best. Step 5. Compare D3 and D4. IRR∆(D3−D4) = 20.4% > 20%. Increment is justiﬁed. D3 is the best. Capital Investment Annual savings Salvage value IRR SEEM5740/ECLT5930 ∆(D2-D4) -18,600 5,200 0 12.3% ∆(D3-D4) -26,200 7,300 11,600 20.4% 17 The incremental analysis procedure SEEM5740/ECLT5930 18 The incremental analysis procedure Step 1. Order the alternatives by increasing capital investment. SEEM5740/ECLT5930 18 The incremental analysis procedure Step 1. Order the alternatives by increasing capital investment. Step 2. Find a base alternative (current best alternative) Investment alternatives: the ﬁrst acceptable alternative in the ordered list. Cost alternatives: the ﬁrst alternative in the ordered list (the one with the least capital investment). SEEM5740/ECLT5930 18 The incremental analysis procedure Step 1. Order the alternatives by increasing capital investment. Step 2. Find a base alternative (current best alternative) Investment alternatives: the ﬁrst acceptable alternative in the ordered list. Cost alternatives: the ﬁrst alternative in the ordered list (the one with the least capital investment). Step 3. Evaluate the difference between the next alternative and the current best alternative. If the incremental cash ﬂow is acceptable, choose the next alternative as the current best alternative. Otherwise, keep the current best alternative and drop the next alternative from further consideration. SEEM5740/ECLT5930 18 The incremental analysis procedure Step 1. Order the alternatives by increasing capital investment. Step 2. Find a base alternative (current best alternative) Investment alternatives: the ﬁrs...
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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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