Consider the following two mutually exclusive projects being considered by an agency. The agency's MARR is 4% per year and the projects have a service life of 5 years. Project Project 2 $14,300 $21,800 $3,743 $5,474 Answer the following questions. Initial cost Annual revenues Present Worth (PW) $2,363 a. Based on the PW, the project that is more economical is Project (Enter the project number). b. Calculate the IRR of each alternative (use the trial-and-error method) The IRR of Project 1 is Round to the nearest one decimal place) The IRR of Project 2 is Round to the nearest one decimal place) O A. Yes OB. No c. Perform the incremental IRR analysis to determine the project that is more economical: Incremental IRR=Round to the nearest one decimal place); Therefore, based on the incremental IRR, Project is more economical. d. Do the two methods produce the same recomendation for the most economical project? $2,569 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 low
Consider the following two mutually exclusive projects being considered by an agency. The agency's MARR is 4% per year and the projects have a service life of 5 years. Project Project 2 $14,300 $21,800 $3,743 $5,474 Answer the following questions. Initial cost Annual revenues Present Worth (PW) $2,363 a. Based on the PW, the project that is more economical is Project (Enter the project number). b. Calculate the IRR of each alternative (use the trial-and-error method) The IRR of Project 1 is Round to the nearest one decimal place) The IRR of Project 2 is Round to the nearest one decimal place) O A. Yes OB. No c. Perform the incremental IRR analysis to determine the project that is more economical: Incremental IRR=Round to the nearest one decimal place); Therefore, based on the incremental IRR, Project is more economical. d. Do the two methods produce the same recomendation for the most economical project? $2,569 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 low
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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e. IMPORTANT Note that from this example that a higher
![### Economic Project Analysis
Consider the following two mutually exclusive projects being considered by an agency, with an agency's Minimum Attractive Rate of Return (MARR) of 4% per year. The projects have a service life of 5 years.
| | Project 1 | Project 2 |
|----------------|-----------|-----------|
| Initial cost | $14,300 | $21,800 |
| Annual revenues| $3,743 | $5,474 |
| Present Worth (PW) | $2,363 | $2,569 |
---
#### Questions
a. **Based on the PW, which project is more economical?**
- The project that is more economical is Project [ ] (Enter the project number).
b. **Calculate the IRR of each alternative using the trial-and-error method.**
- The IRR of Project 1 is [ ]% (Round to the nearest one decimal place).
- The IRR of Project 2 is [ ]% (Round to the nearest one decimal place).
c. **Perform the incremental IRR analysis to determine the more economical project.**
- Incremental IRR = [ ]% (Round to the nearest one decimal place).
- Therefore, based on the incremental IRR, Project [ ] is more economical.
d. **Do the two methods produce the same recommendation for the most economical project?**
- A. Yes
- B. No
e. **Important Note**
- This example illustrates that a higher IRR for an individual alternative does **not** guarantee that the alternative is more economical than the one with a lower IRR.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3fc923da-597d-435e-8082-d40f278cf098%2Fc93d982e-1aea-48ac-8c1c-876cf6fd00d3%2F9yx5pjm_processed.png&w=3840&q=75)
Transcribed Image Text:### Economic Project Analysis
Consider the following two mutually exclusive projects being considered by an agency, with an agency's Minimum Attractive Rate of Return (MARR) of 4% per year. The projects have a service life of 5 years.
| | Project 1 | Project 2 |
|----------------|-----------|-----------|
| Initial cost | $14,300 | $21,800 |
| Annual revenues| $3,743 | $5,474 |
| Present Worth (PW) | $2,363 | $2,569 |
---
#### Questions
a. **Based on the PW, which project is more economical?**
- The project that is more economical is Project [ ] (Enter the project number).
b. **Calculate the IRR of each alternative using the trial-and-error method.**
- The IRR of Project 1 is [ ]% (Round to the nearest one decimal place).
- The IRR of Project 2 is [ ]% (Round to the nearest one decimal place).
c. **Perform the incremental IRR analysis to determine the more economical project.**
- Incremental IRR = [ ]% (Round to the nearest one decimal place).
- Therefore, based on the incremental IRR, Project [ ] is more economical.
d. **Do the two methods produce the same recommendation for the most economical project?**
- A. Yes
- B. No
e. **Important Note**
- This example illustrates that a higher IRR for an individual alternative does **not** guarantee that the alternative is more economical than the one with a lower IRR.
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