4. Three mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are given in the table below. The MARR of the company is 20% per year. At the end of its useful life, the investment will be sold with end-of-life market values given in the table. A Investment cost Annual expenses B C $28,000 $55,000 $40,000 $15,000 $13,000 $22,000 $23,000 $28,000 $32,000 Annual revenues Market value at the end of life $6,000 $8,000 $10,000 Useful life IRR 10 years 10 years 10 years 26.4% 24.7% 22.4% (a) Explain why the decision should not be made by comparing IRR values for the three alternatives. (b) Recommend the best alternative by using an appropriate method.

4. Three mutually exclusive design alternatives are being considered. The estimated cash flows for each alternative are given in the table below. The MARR of the company is 20% per year. At the end of its useful life, the investment will be sold with end-of-life market values given in the table. A Investment cost Annual expenses B C $28,000 $55,000 $40,000 $15,000 $13,000 $22,000 $23,000 $28,000 $32,000 Annual revenues Market value at the end of life $6,000 $8,000 $10,000 Useful life IRR 10 years 10 years 10 years 26.4% 24.7% 22.4% (a) Explain why the decision should not be made by comparing IRR values for the three alternatives. (b) Recommend the best alternative by using an appropriate method.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.4IP

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