Question

the table below summarizes the comparison between four mutually exclusive alternatives using the irr method. the marr is 15%. step 1 of the incremental analysis has been done as shown. which two alternatives should be compared in step 2?
alternative v w x y step 1 w vs v step 2
initial cost $100,000 $130,000 $220,000 $354,000 $50,000?
annual income $21,500 $31,200 $46,500 $74,000 $9,700
irr 23.7% 20.2% 16.6% 16.3% 14.3%
oa. x vs v
ob. y vs w
oc. x vs w
od. y vs x
oe y vs v

Explanation:

Step1: Incremental IRR Analysis Rule

In incremental IRR analysis for mutually - exclusive projects, we start with the lowest - cost viable project (a project with \(IRR\geq MARR\)). Here, \(V\) has \(IRR = 23.7\%>15\%\), \(W\) has \(IRR=20.2\%>15\%\), \(X\) has \(IRR = 16.6\%>15\%\), and \(Y\) has \(IRR=16.3\%>15\%\). After the first comparison (\(W\) vs \(V\)), we move to the next - higher cost project.

Step2: Select the Next Comparison

The order of initial cost is \(V(\$80,000)

Answer:

C. X vs W