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
Q. Explain crystal lattice of BCC, FCC and HCP. Ans. (a) BCC (Body centered cubic): Body centered cubic structure, the unit cell, we observe in addition to the atoms at eight

Variable magnetic coupling transducers A transducer of this type relies on variable coupling between magnetic coils. An example is a Linear Variable Differential Transformer (L

function ismember - set operations: The function ismember receives two vectors as input arguments, and returns a logical vector which is of similar length as the first argumen


factors affecting engine performance

two frames are not joint properly so create gap between two frames so material lick from this gap

An object, such as an aerofoil, moving through a fluid disturbs the surrounding flow field. The fluid velocity varies along the aerofoil surface creating a variation in pressure as

Liquid crystal display (lcd): Liquid Crystal Displays (LCD) are not actually light sources - they generate no light, merely filtering incident light, in a controlled manner.  T

Various types of Bituminous Course? Explain each

The following information was extracted from the accounting records of De Walt Company as at 28 February 2011 (the end of their financial year): Sales (50% on credit) 1 400 000 Cos