IRR: Choice 2

Given the IRRs and incremental IRRs shown, which asset would you chose if the MARR is 10%. Assume the assets are ordered from smallest initial investment to largest.

  • A
  • B
  • C
  • D

* E

  • None of the Assets

First eliminate all assets with IRR < MARR; in this case only B is eliminated. If we use the exclusive choice procedure, we start with the asset with the lowest initial investment. Since they are ordered lowest to highest, 'A' is our best choice. We set 'C' as the challenger and compare the IRR of 'A' and 'C' to the MARR. The IRR is 15%, which is greater than the MARR, so 'A' is eliminated and 'C' becomes the best choice. Now we set 'D' as the challenger and compare the IRR of 'C' and 'D' to the MARR. The IRR is 16%, which is greater than the MARR, so 'C' is eliminated and 'D' becomes the best choice. Compare the IRR of 'D' to E' which is 19%, which is greater than the MARR. Therefore 'D' is eliminated, and the remaining asset, 'E' is the best.

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