Consider the following two mutually exclusive alternatives for reclaiming a deteriorating inner-city neighborhood (one of them must be chosen). Notice that the IRR for both alternatives is 27.19%.
Alternatives
EOY X Y
0 -$100,000 -$100,000
1 $50,000 0
2 $51,000 0
3 $60,000 $205,760
1RR 27.19% 27.19%
a. which alternative should be chosen if MARR is 15% per year
b. If MARR is 15% per year, which alternative is better?
c. What is the IRR on the incremental cash flow [i. e., β(Y β X)]?
d. If the MARR is 27.5% per year, which alternative is better?
e. What is the simple payback period for each alternative?
f. Which alternative would you recommend?
Answers: 2
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