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11ComparisonMethods2-2013.pdf-Problem with IRR • Proposal A:showing page 34-36 out of 44

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Page 34
34
Problem with IRR
Proposal A:
Invest $1000
Receive $1200 after 1 year
IRR = 20.0%
Proposal B:
Invest $950
Receive $315 at the end of each year
for 5 years
IRR = 18.2%
Which is better?


Page 35
35
Focus
Project
First Cost
Life
Annual
Benefits
IRR %
PW
EAW
Cumulative
FC
Profitability
Index
Energy Efficiency
B
50,000
20
16,700
33.3%
74,740
10,006
50,000
2.49
Capacity Expansion
A
100,000
15
35,600
35.2%
142,467
20,918
100,000
2.42
Capacity Expansion
D
120,000
15
36,700
30.0%
129,959
19,081
220,000
2.08
Pollution Control
C
75,000
10
26,100
32.8%
72,471
12,826
295,000
1.97
Pollution Control
G
60,000
15
16,900
27.4%
55,104
8,091
355,000
1.92
Energy Efficiency
I
90,000
20
21,500
23.5%
70,593
9,451
445,000
1.78
Lower costs on Product 2
F
50,000
10
15,300
28.0%
36,448
6,451
495,000
1.73
Capacity Expansion
J
120,000
20
27,600
22.6%
86,157
11,535
615,000
1.72
Capacity Expansion
L
130,000
15
29,500
21.5%
70,921
10,413
745,000
1.55
Energy Efficiency
Q
50,000
20
10,000
19.4%
24,694
3,306
795,000
1.49
Pollution Control
K
40,000
10
10,300
22.3%
18,197
3,221
835,000
1.45
Lower costs on Product 1
E
40,000
5
16,000
28.6%
17,676
4,904
875,000
1.44
Pollution Control
P
65,000
15
13,700
19.6%
28,309
4,156
940,000
1.44
Lower costs on Product 5
N
85,000
10
20,500
20.3%
30,830
5,456
1,025,000
1.36
Lower costs on Product 3
H
40,000
5
15,000
25.4%
14,072
3,904
1,065,000
1.35
Capacity Expansion
O
175,000
10
41,600
19.9%
60,049
10,628
1,240,000
1.34
Capacity Expansion
S
100,000
10
22,200
17.9%
25,435
4,502
1,340,000
1.25
Capacity Expansion
V
100,000
10
22,000
17.7%
24,305
4,302
1,440,000
1.24
Pollution Control
T
90,000
15
16,400
16.3%
21,698
3,186
1,530,000
1.24
Lower costs on Product 4
M
60,000
5
20,400
20.8%
13,537
3,755
1,590,000
1.23
Lower costs on Product 6
R
50,000
5
16,200
18.6%
8,397
2,330
1,640,000
1.17
Lower costs on Product 7
U
50,000
10
10,300
15.9%
8,197
1,451
1,690,000
1.16
Lower costs on Product 8
W
80,000
5
23,500
14.4%
4,712
1,307
1,770,000
1.06
Lower costs on Product 9
X
75,000
5
21,600
13.5%
2,863
794
1,845,000
1.04
Capacity Expansion
Y
105,000
10
19,000
12.5%
2,354
417
1,950,000
1.02
MARR = 12%


Page 36
36
Mutually exclusive projects
These are situations when only one project can
be done because:
any one project will do the job
you can only have one project done
the resulting projects, if both (all) were installed
would all do the same thing
Caution: preferred alternative is not necessarily
the one with the highest IRR, the INCREMENTAL
METHOD is required
Projects must have or be transformable to have
equal lives


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