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Selecting the alternative with the largest rate of return can lead to
incorrect decisions DO NOT compare the IRR of one alternative to
the IRR of another alternative. The only legitimate comparison is the
IRR to the MARR.
Remember, the base alternative must be attractive (rate of return
greater than the MARR), and the additional investment in other
alternatives must itself make a satisfactory rate of return on that
increment.
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Initial cost
Net annual income
IRR on total cash flow
Alt. A
Alt. B
-$25,000
-$35,000
$7,500
$10,200
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Initial cost
Net annual income
IRR on total cash flow
Alt. A
Alt. B
-$25,000
-$35,000
$7,500
$10,200
15%
14%
Alt. B-Alt. A
Initial cost
Net annual income
IRR on total cash flow
Alt. A
Alt. B
Alt. B-Alt. A
-$25,000
-$35,000
-$10,000
$7,500
$10,200
$2,700
15%
14%
11%
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Investment alternatives
Cash flows reinvested at the MARR to the end of the study period
Replace with another asset, with possibly different cash flows, after the study
period
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Note that the least common multiple of the useful lives of Alt. A and B
is 12 years. Use repeatability and PW Method to solve.
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A
$3,500
$1,255
4
B
$5,000
$1,480
6
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A
$3,500
$1,255
B
$5,000
$1,480
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Alternative A
Alternative B
Initial Cost
$50,000
$75,000
Annual Revenue
$5,000
$5,000
$10,000
$12,000
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$20,000
$15,000
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