USA: +1 (725) 712-1730 
Sign in
![3.2Two hazardous environment facilities are evaluated, with the projected life of each facility being 10 years. The cash flows are as follows First Cost Maintenance & Operating Costs Annual Benefits Salvage Value Project life Alternative A $615,000 $10,000 $158,000 $65,000 10 Alternative B $300,000 $25,000 $92,000 -$5,000 The company uses a MARR of 15%. Using rate of return analysis, which alternative should be selected? a) List the table of Incremental Cash Flow based on the two alternatives [2 points] b) Calculate the Incremental IRR for the system investment [3 points] c) Which alternative should be chosen? Why? [1 points 1 point]](https://d2vlcm61l7u1fs.cloudfront.net/media%2F5b8%2F5b87eaf4-6c68-4860-8a6c-a23917da1229%2FphpnXdSUx.png)
3.2Two hazardous environment facilities are evaluated, with the projected life of each facility being 10 years. The cash flows are as follows First Cost Maintenance & Operating Costs Annual Benefits Salvage Value Project life Alternative A $615,000 $10,000 $158,000 $65,000 10 Alternative B $300,000 $25,000 $92,000 -$5,000 The company uses a MARR of 15%. Using rate of return analysis, which alternative should be selected? a) List the table of Incremental Cash Flow based on the two alternatives [2 points] b) Calculate the Incremental IRR for the system investment [3 points] c) Which alternative should be chosen? Why? [1 points 1 point]
Expert Answer
| Alternative A | |||||
| Years | First cost | Maintenance and operating | Annual benefits | Salvage Value | Total cashflow |
| 0 | -615000 | -615000 | |||
| 1 | -10000 | 158000 | 148000 | ||
| 2 | -10000 | 158000 | 148000 | ||
| 3 | -10000 | 158000 | 148000 | ||
| 4 | -10000 | 158000 | 148000 | ||
| 5 | -10000 | 158000 | 148000 | ||
| 6 | -10000 | 158000 | 148000 | ||
| 7 | -10000 | 158000 | 148000 | ||
| 8 | -10000 | 158000 | 148000 | ||
| 9 | -10000 | 158000 | 148000 | ||
| 10 | -10000 | 158000 | 65000 | 213000 | |
| Alternative B | |||||
| Years | First cost | Maintenance and operating | Annual benefits | Salvage Value | Total cashflow |
| 0 | -300000 | -300000 | |||
| 1 | -25000 | 92000 | 67000 | ||
| 2 | -25000 | 92000 | 67000 | ||
| 3 | -25000 | 92000 | 67000 | ||
| 4 | -25000 | 92000 | 67000 | ||
| 5 | -25000 | 92000 | 67000 | ||
| 6 | -25000 | 92000 | 67000 | ||
| 7 | -25000 | 92000 | 67000 | ||
| 8 | -25000 | 92000 | 67000 | ||
| 9 | -25000 | 92000 | 67000 | ||
| 10 | -25000 | 92000 | -5000 | 62000 |
| Alternative A | Alternative B | |
| Total Inflow (1) | 1545000 | 665000 |
| No of years (2) | 10 | 10 |
| Average yearly outflow (3)=(1)/(2) | 154500 | 66500 |
| Intial outflow (4) | 615000 | 300000 |
| Annual rate of return (3)/(4) | 25.12% | 22.17% |
Since ARR of both the projects are above MARR hence both the project are acceptable. In case of mutually exclusive projects project A’ ARR is higher than project B. A should be accepted.
Answer A
| Years | Total cashflow Project A |
Total cashflow Project B |
Incremental cashflow of project A over B |
| 0 | -615000 | -300000 | -315000 |
| 1 | 148000 | 67000 | 81000 |
| 2 | 148000 | 67000 | 81000 |
| 3 | 148000 | 67000 | 81000 |
| 4 | 148000 | 67000 | 81000 |
| 5 | 148000 | 67000 | 81000 |
| 6 | 148000 | 67000 | 81000 |
| 7 | 148000 | 67000 | 81000 |
| 8 | 148000 | 67000 | 81000 |
| 9 | 148000 | 67000 | 81000 |
| 10 | 213000 | 62000 | 151000 |
| Total | 565000 | ||
Answer B
Incremental IRR of project A over B is 23.15% hence A should be accepted.
| Years | Total cashflow Project A |
Total cashflow Project B |
Incremental cashflow of project A over B |
| 0 | -615000 | -300000 | -315000 |
| 1 | 148000 | 67000 | 81000 |
| 2 | 148000 | 67000 | 81000 |
| 3 | 148000 | 67000 | 81000 |
| 4 | 148000 | 67000 | 81000 |
| 5 | 148000 | 67000 | 81000 |
| 6 | 148000 | 67000 | 81000 |
| 7 | 148000 | 67000 | 81000 |
| 8 | 148000 | 67000 | 81000 |
| 9 | 148000 | 67000 | 81000 |
| 10 | 213000 | 62000 | 151000 |
| Incremental IRR | 23.15% | ||
IRR calculated usning excel function IRR(P5:P15)
