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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 ∆(D4D1)
22,000
6,900
14,00010,000=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 ∆(D2D4)
18,600
5,200
0
12.3% ∆(D3D4)
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.
 Fall '12
 ZHOU,Xiang

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