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 the use of HEC-HMS modelling in water supply system ,how we use it? what is the necessary input for the software?

give information on workshop organisations

TELL ME THE WORKING OF BASIC WAVE ANALYZER WITH DIAGRAM

dc load line for a diode & same for circuit consisting of supply voltage in series with resistance & diodes

Safe Operating Range The SOR is the max distance between airfields which the aircraft can fly with full allowance for headwind, diversion, stacking. • Distance flown in climb

N e w Assembly Buildings: 12.1.1.1 The requirements of this chapter shall apply to new buildings or portions thereof used as an assembly occupancy. 12.1.3.2 Simultaneous

explain compensated semiconductors

all about pepsi company symbol PEP 1. What is the name of the company? What is the industry sector? 2. What are the operating risks of the company? 3. What is the financial risk

In the Aircraft Performance course, the aircraft was assumed to be in a steady-state (e.g. steady  cruise, climb, turn, glide), with the forces and moments balanced. The subject of

FUNCTIONAL CHECKS OF CHEMICAL DE-ICING SYSTEMS: Once the correct flow rate of the fluid supply has been established the distribution of the fluid flow over the blades should be