Consider the following two mutually exclusive projects being considered by an agency. The agency’s MARR is 3% per year…

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Consider the following two mutually exclusive projects being considered by an agency. The agency’s MARR is 3% per year and the projects

have a service life of 5 years.

Answer the following questions.

Initial cost

Annual revenues

Present Worth (PW)

Project 1

$14,600

$3,881

$3,174

a. Based on the PW, the project that is more economical is Project

b. Calculate the IRR of each alternative (use the trial-and-error method)

% (Round to the nearest one decimal place)

The IRR of Project 1 is

The IRR of Project 2 is

% (Round to the nearest one decimal place)

Project 2

$22,000

$5,583

$3,569

(Enter the project number). Consider the following two mutually exclusive projects being considered by an agency. The agency’s MARR is 3% per year and the projects have a service life of 5 years.

Project 1

Project 2

$14,600

$22,000

$3,881

$5,583

Initial cost

Annual revenues

Present Worth (PW)

c. Perform the incremental IRR analysis to determine the project that is more economical:

Incremental IRR = % (Round to the nearest one decimal place);

O A. No

OB. Yes

$3,174

Therefore, based on the incremental IRR, Project is more economical.

d. Do the two methods produce the same recomendation for the most economical project?

$3,569 e. IMPORTANT: Note from this example that a higher IRR for an individual alternative does not guarantee that the alternative is more economical than the one with a lower IRR. It is

the incremental IRR value relative to the MARR that determines which alternative is more economical. The result of the incremental analysis are always the same as those of

the PW, AW or FW analysis.

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