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Consider the two mutually exclusive alternatives given in Table P7.40. (a) Determine the IRR on the incremental

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Consider the two mutually exclusive alternatives given in Table P7.40.

(a) Determine the IRR on the incremental investment in the amount of $2,000.
(b) If the firm’s MARR is 10%, which alternative is the better choice?

Transcribed Image Text:

TABLE P7.40 n 0 1 2 3 Net Cash Flow Project A1 -$12,000 5,000 5,000 5,000 Project A2 -$14,000 6,200 6,200 6,200

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a IRR on the incremental investment b Since it is a...View the full answer


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Contemporary Engineering Economics

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The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.

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