Answer to Question #264948 in Civil and Environmental Engineering for Egyy

Question

A firm is considering three mutually exclusive alternatives as part of a production improvement program.

The alternatives are:

A B C

Installed cost $10,000 $15,000 $20,000

Uniform annual benefit 1,625 1,530 1,890

Useful life, in years 10 20 20

The salvage value at the end of the useful life of each alternative is zero. At the end of 10 years,

Alternative A could be replaced with another A with identical cost and benefits. The maximum attractive

rate of return is 6%. Which alternative should be selected

Answer 1

The IRR of the difference between the base alternative and second alternative

IRR (Alternative III - Alternative II)= 4.6 %

The IRR of the difference between the base alternative and third alternative

IRR (Alternative III - Alternative I) = 7.3 %

The best alternative for the company will be Alternative I because it will give highest net present value.