Exclusive Choice Example
n Project 1 Project 2 Project3
0 -2000 -1000 -3000
1 1500 800 1500
2 1000 500 2000
3 800 500 1000

Q. Which project are you going to select, assuming that MARR=15%?

Step1- Calculate the IRR for all assets
[Project 1] -2000 + 1500/〖(1+i)〗^1 + 1000/〖(1+i)〗^2 + 800/〖(1+i)〗^3 = 0 => i=34.37%
[Project 2] -1000 + 800/〖(1+i)〗^1 + 500/〖(1+i)〗^2 + 500/〖(1+i)〗^3 = 0 => i=40.76%
[Project 3] -3000 + 1500/〖(1+i)〗^1 + 2000/〖(1+i)〗^2 + 1000/〖(1+i)〗^3 = 0 => i=24.81%

Step2- Eliminate all assets with IRR<MARR
However, in this example, all three option’s IRR is bigger than MARR(15%). So we don’t need to eliminate any assets.

Step3- Because project2’s initial cost is the least expensive, let’s assume that this is the current best choice.

Step4- then let’s compare two things, [next most expensive cost - current best choice cost]
In this example, next most expensive cost is project 1.

n Pro1-Pro2
0 -1000
1 700
2 500
3 300

Calculate the IRR about this result again. => i=27.61%
Because IRR > MARR (it means that Pro1 is preferred over Pro2)
We can eliminate project2 option and we can upgrade to the next most expensive option.
And Pro1 is current best choice cost now.

Step5- compare two things after eliminating Project 2.
Pro1 has lower initial cost, think of Pro3-Pro1.

n Pro3-Pro1
0 -1000
1 0
2 1000
3 200

Calculate the IRR about this result again. => i=8.8%
Because IRR<MARR, we have no more upgrades that are attractive.
And we can eliminate Pro3 and we can know Pro 1is preferred over Pro3.

*ANSWER: Project 1 is the best choice according to the exclusive choice internal rate of return procedure.

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License