IRR: Choice 1

Assume the assets are arranged from lowest initial investment to highest, which asset would you choose when the MARR is 4%?

Question options:

  • A
  • B
  • C
  • D

Answer:

All of the IRR are greater than the MARR, so none are eliminated and you'll start with the least expensive choice.

Assume (A) is the best choice, then take the next most expensive (B) and find the incremental rate (B)-(A) = 23% therefore you eliminate A.

Then find the incremental rate between the next best choice (C) and the current best choice (B), which is 3%. 3% is less than MARR, so eliminate choice C.

(B) is still preferred so compare it to (D) which has an incremental rate of 12%, so you can eliminate (B) leaving you with (D) as the best choice.

Asset D is the best choice.

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