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Consider the following assets. The far right of the table may be read as the incremental internal rate of return between the row asset moving to the column asset. 0 1 2 3 4 PW(10%) IRR A B C D Life A -9.00 0.00 0.00 0.00 30.00 11.49 -Inf -Inf -Inf 4.00 B -10.00 0.00 21.00 0.00 5.78 28.06 0.00 18.56 3.00 C -11.00 0.00 0.00 22.00 4.03 18.92 29.79 4.00 D -22.00 0.00 41.00 0.00 8.80 23.06 3.00
i(1+i)N (1+i)N −1
(1+i)N −1 i(1+i)N
1. What is the internal rate of return of asset A?
2. At a MARR of 10% and requirement to provide 12 years of service, which asset would you chose? Be sure to explain why this is the best asset.
3. At a MARR of 10% and no service requirement, which asset would you chose? Be sure to explain why this is the best asset.
4. At a MARR of 20% and no service requirement, which asset would you chose? Be sure to explain why this is the best asset.
27 3. Lif e). 1 . Don’t be shocked if that leaves you with no assets. 4.62 2.Answer Key 1. just pick the big one. The upshot is that you can use the annual worth criteria. Answer: You can set the present worth of asset A to zero and solve for the interest rate or you can use the closed form method for when there is only a cost and beneﬁt in periods zero and N.12% 2. Answer: You should be using the IRR exclusive choice procedure on this one. For each of the assets calculate the annual worth. Remember the key steps are to order the assets from smallest to largest initial investment and then eliminate all assets with internal rates of return less than MARR. AW (Asset) = P W (Asset)(A|P. Just pick the one with the largest Present Worth. This evaluates to 35. −AN A0 1 N . A B C D AW 3. Answer: This is the exclusive choice criteria. After that stay in the ’while’ loop of your procedure checking if the incremental internal rates of return are greater than MARR. i.54 3. The table below gives the annual worth.32 1. Answer: This question is set up so that the asset lives are factors of the planning horizon. Please note that the lives of the asset are listed on the far right of the table and that the present worth values are calculated for you.