ECE 192, Spring 2023

Tutorial 6 Solution

Problem-1 Solution

a) With a MARR of 16%, choose projects 1, 3 and 4 as their IRRs meet or exceed 16%.

b) For MARR = 15%: The current best is alternative 1, which has the lowest first cost and 𝐼𝑅𝑅 ≥
𝑀𝐴𝑅𝑅.

Challenge 1 with 2: incremental IRR is 9%; challenge fails.

Challenge 1 with 3: incremental IRR is 17%; challenge succeeds. Hence, 3 is the current best.

Challenge 3 with 4: incremental IRR is 13%; challenge fails.

Pick 3.

c) For MARR = 17%: The current best is alternative 1, which has the lowest first cost and 𝐼𝑅𝑅 ≥
𝑀𝐴𝑅𝑅.

Challenge 1 with 2: incremental IRR is 9%; challenge fails.

Challenge 1 with 3: incremental IRR is 17%; challenge still succeeds because 𝐼𝑅𝑅 ≥ 𝑀𝐴𝑅𝑅.
Hence, 3 is currently best.

Challenge 3 with 4: incremental IRR is 13%; challenge fails.

Pick 3.

Problem-2 Solution

a) The Problem has 2 sign changes; thus, it has two possible roots

b) First, we find the PW of the Expenses with the Financing rate:

𝑃𝑊 = −500 − 1 200(𝑃/𝐹, 6%, 2) − 300(𝑃/𝐹, 6%, 3)

𝑃𝑊 = −500 − 1 200 × 0.89 − 300 × 0.83962

𝑃𝑊 = −$1 819.89

Then, we find the FW of the receipts with the investing rate:

𝐹𝑊 = 2000(𝐹/𝑃, 12%, 2)

𝐹𝑊 = $2 508.80
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Finally, we find the MIRR that makes the FW equivalent.

0 = (1 + 𝑀𝐼𝑅𝑅)𝑛 𝑃𝑊 + 𝐹𝑊

0 = (1 + 𝑀𝐼𝑅𝑅)3 (−1 819.89) + 2 508.80

→ 𝑀𝐼𝑅𝑅 = 0.1129 ~ 11.29%

Problem-3 Solution

First, we find the IRR of each alternative previous to analyze the incremental IRR for the investments.
𝑰𝑹𝑹𝒂 = 𝟎 = −𝟕𝟏, 𝟎𝟎𝟎 + 𝟐𝟎, 𝟎𝟎𝟎(𝑷⁄𝑨 , 𝒊∗ , 𝟔) + 𝟏𝟎, 𝟎𝟎𝟎(𝑷⁄𝑭 , 𝒊∗ , 𝟔)
𝑰𝑹𝑹𝑩 = 𝟎 = −𝟔, 𝟎𝟎𝟎 + 𝟓, 𝟎𝟎𝟎(𝑷⁄𝑨 , 𝒊∗ , 𝟔)
𝑰𝑹𝑹𝒄 = 𝟎 = −𝟑𝟔, 𝟎𝟎𝟎 + 𝟏𝟕, 𝟎𝟎𝟎(𝑷⁄𝑨 , 𝒊∗ , 𝟔) − 𝟐, 𝟓𝟎𝟎(𝑷⁄𝑮 , 𝒊∗ , 𝟔)
Using trial and error and interpolation
𝑰𝑹𝑹𝒂 = 𝟏𝟗. 𝟔𝟏% 𝑰𝑹𝑹𝒃 = 𝟖𝟎. 𝟗𝟒% 𝑰𝑹𝑹𝒄 = 𝟐𝟓. 𝟒𝟐%
All alternatives have IRR>MARR, then we proceed to analyze IRR on incremental investments. First,
we order the alternatives based on first costs.

1st Alternative B
2nd Alternative C
3rd Alternative A
Calculate IRR on incremental investment Alt. C – Alt. B

year Alt. C Alt. B C-B

0 -36,000 -6,000 -30,000
1 17,000 5,000 12,000
2 14,500 5,000 9,500
3 12,000 5,000 7,000
4 9,500 5,000 4,500
5 7,000 5,000 2,000
6 4,500 5,000 -500

The net cash flow has a non-standard form, so external rate of return (ERR) must be used.

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𝑬𝑹𝑹𝑪−𝑩 = −𝟑𝟎, 𝟎𝟎𝟎(𝑭⁄𝑷 , 𝒊∗ , 𝟔)
+ [𝟏𝟐, 𝟎𝟎𝟎 − 𝟐, 𝟓𝟎𝟎(𝑨⁄𝑮 , 𝟏𝟎%, 𝟓)](𝑭⁄𝑨 , 𝟏𝟎%, 𝟓)(𝑭⁄𝑷 , 𝟏𝟎%, 𝟏) − 𝟓𝟎𝟎
For:
𝒊 = 𝟏𝟎% → 𝑬𝑹𝑹𝑪−𝑩 = −𝟑𝟒𝟒𝟗. 𝟕𝟔
𝒊 = 𝟗% → 𝑬𝑹𝑹𝑪−𝑩 = −𝟔𝟏𝟓. 𝟗𝟑𝟑
𝒊 = 𝟖% → 𝑬𝑹𝑹𝑪−𝑩 = 𝟐𝟎𝟗𝟎. 𝟖𝟒
By interpolation:
𝒊∗ = 𝟖. 𝟕𝟖% < 𝑴𝑨𝑹𝑹 Then, we discard Alt. C
Calculate IRR on incremental investment Alt. A – Alt. B

year Alt. A Alt. B A-B

0 -71,000 -6,000 -65,000
1 20,000 5,000 15,000
2 20,000 5,000 15,000
3 20,000 5,000 15,000
4 20,000 5,000 15,000
5 20,000 5,000 15,000
6 30,000 5,000 25,000

The net cash flow has a standard form, so IRR must be used
𝑰𝑹𝑹𝑨−𝑩 = 𝟎 = −𝟔𝟓, 𝟎𝟎𝟎 + 𝟏𝟓, 𝟎𝟎𝟎(𝑷⁄𝑨 , 𝒊∗ , 𝟔) + 𝟏𝟎, 𝟎𝟎𝟎(𝑷⁄𝑭 , 𝒊∗ , 𝟔)
For:
𝒊 = 𝟏𝟎% → 𝑰𝑹𝑹𝑨−𝑩 = 𝟓𝟗𝟕𝟑. 𝟔𝟓
𝒊 = 𝟏𝟏% → 𝑰𝑹𝑹𝑨−𝑩 = 𝟑𝟖𝟎𝟒. 𝟒𝟖
𝒊 = 𝟏𝟐% → 𝑰𝑹𝑹𝑨−𝑩 = 𝟏𝟕𝟑𝟕. 𝟒𝟐
𝒊 = 𝟏𝟑% → 𝑰𝑹𝑹𝑨−𝑩 = −𝟐𝟑𝟑. 𝟓𝟕

By interpolation:
𝒊∗ = 𝟏𝟐. 𝟖𝟖% > 𝑴𝑨𝑹𝑹 Then, we discard Alt. B, and the winner is Alternative A.

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Problem-4 Solution

First, we order the alternatives based on first costs (in this case on first benefits) considering as the first
alternative the Do Nothing option.

1st Do Nothing
2nd Job 3
3rd Job 2
4rd Job 1
Now, we calculate the incremental cash flow of J3 – DN

year J3 DN J3 - DN
0 175,000 0 175,000
1 -150,000 0 -150,000
2 -150,000 0 -150,000
3 150,000 0 150,000

The net cash flow has a non-standard form, so external rate of return (ERR) must be used
𝑬𝑹𝑹𝑱𝟑−𝑫𝑵 = 𝟎 = 𝟏𝟕𝟓, 𝟎𝟎𝟎(𝑭⁄𝑷 , 𝟏𝟎%, 𝟑) − 𝟏𝟓𝟎, 𝟎𝟎𝟎(𝑭⁄𝑨 , 𝒊∗ , 𝟑) + 𝟑𝟎𝟎, 𝟎𝟎𝟎
Solving for 𝒊∗ :
𝒊∗ = 𝟏𝟕. 𝟒𝟏% > 𝑴𝑨𝑹𝑹 Then, we discard DN

Calculate IRR on incremental investment J2 – J3

year J2 J3 J2 - J3
0 150,000 175,000 -25,000
1 -100,000 -150,000 50,000
2 -100,000 -150,000 50,000
3 130,000 150,000 -20,000
The net cash flow has a non-standard form, so external rate of return (ERR) must be used
𝑬𝑹𝑹𝑱𝟐−𝑱𝟑 = 𝟎 = −𝟐𝟓, 𝟎𝟎𝟎(𝑭⁄𝑷 , 𝒊∗ , 𝟑) + 𝟓𝟎, 𝟎𝟎𝟎(𝑭⁄𝑨 , 𝟏𝟎%, 𝟑) − 𝟕𝟎, 𝟎𝟎𝟎
Solving for 𝒊∗ :
𝒊∗ = 𝟓𝟔. 𝟑𝟐% > 𝑴𝑨𝑹𝑹 Then, we discard J3

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Calculate IRR on incremental investment J1 – J2

year J1 J2 J1 – J2
0 100,000 150,000 -50,000
1 -75,000 -100,000 25,000
2 -75,000 -100,000 25,000
3 125,000 130,000 -5,000

The net cash flow has a non-standard form, so external rate of return (ERR) must be used
𝑬𝑹𝑹𝑱𝟏−𝑱𝟐 = 𝟎 = −𝟓𝟎, 𝟎𝟎𝟎(𝑭⁄𝑷 , 𝒊∗ , 𝟑) + 𝟐𝟓, 𝟎𝟎𝟎(𝑭⁄𝑨 , 𝟏𝟎%, 𝟑) − 𝟑𝟎, 𝟎𝟎𝟎
Solving for 𝒊∗ :
𝒊∗ = 𝟏. 𝟖% < 𝑴𝑨𝑹𝑹 Then, we discard J1; thus Job 2 is the final decision.