Internal rate of return: multiple alternatives, Other Engineering

Internal Rate of Return: Multiple Alternatives

To compare multiple alternatives using the IRR as measure of economic worth we must use the incremental approach. It is erroneous to use the ranking approach to compare multiple alternatives using the IRR (or MIRR) as the economic worth. This is based on the economic analysis principle # 6: Continue to invest as long as each additional increment of investment yields a return that is greater than the investor's TVOM (MARR).

Recall the incremental approach (White et al.). In summary

1. Rank the feasible alternatives in increasing order of the initial investment.

2. Calculate the IRR of the alternative with the minimum investment (same as incremental versus do nothing). If alternative has an IRR > MARR then select it as the new defender, and proceed to step 3. If IRR < MARR then select the next alternative with the second minimum investment, and repeat step 2.

3. Select alternative with the next investment level (in ascending order) as the new challenger. Calculate the incremental cash flow of Challenger - cash flow of defender. Calculate the IRR of the incremental cash flow. If IRR > = MARR then select the new challenger as the defender, and repeat step 3 until no alternative can be selected as defender.

4. The preferred alternative is the current (last) defender.

Example

a) Calculate the IRR independently for each of the feasible alternatives of example.

b) Compare the feasible alternatives using the incremental approach.

Note that if we would use the ranking approach we would erroneously select alternative 2 as the preferred alternative (largest IRR). However, using the incremental approach the preferred alternative is 6, which is the same conclusion obtained with the PW, AW, and FW method.

Posted Date: 3/15/2013 5:46:37 AM | Location : United States







Related Discussions:- Internal rate of return: multiple alternatives, Assignment Help, Ask Question on Internal rate of return: multiple alternatives, Get Answer, Expert's Help, Internal rate of return: multiple alternatives Discussions

Write discussion on Internal rate of return: multiple alternatives
Your posts are moderated
Related Questions
What is Treasury Bills? Treasury expenses are one of the finance devices in temporary money market. It is unprotected promissory observe from the govt part of the RBI to satisfy

HOW WOULD YOU JUDGE THE POTENTIAL PROFIT OF BAJAJ ELECTRONICS

design of a single stage amplifier

what things require for finance project on capital budgeting?

Can you guys Solve Unit Operations Problems in Chemical engineering

One approach of an intersection with fixed time traffic signals, vehicles arrive at 500 veh/h on the approach. The cycle time of the intersection is 80 seconds, and the effective g


#questiodescribe different types of cro probes

The guidance law is used to generate a requirement (usually an required acceleration) that will achieve the guidance objective. In this course, we will look at three main types

how to develop an algorithm that will accept the names of sales staff members and the total sales for the month.the algorithm must calculate the commission of 3% of the total sales