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Selecting the best investment proposal

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Slot Precision Services, Inc. has five alternative broaching machines/processes that are being studied. Only one will be chosen and the data is shown below. Recommend the choice for management that uses the internal rate of return criterion. Compare this with the decision with that of a Present Worth criterion. Submit your solution in a spreadsheet.

MARR 15% EAR
Time Horizon 5 years

Alternatives Investment in year 0 Annual Cash Flow Salvage value in last year
1 $50,000 $18,000 $0
2 $250,000 $85,000 $75,000
3 $350,000 $105,000 $125,000
4 $600,000 $150,000 $400,000
5 $800,000 $165,000 $600,000

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Solution Summary

The solution depicts the steps to calculate the NPV and IRR parameters for the given proposals. It also selects the best proposal.

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Choosing the best investment proposal

Just One, Inc. has two mutually exclusive investment projects P & Q, shown below. Suppose the interest rate is 10%.

Project Investment Year 1 Year 2 IRR NPV(r=10%)
P -200.00 140 128.25 22.4% 33.26
Q -100.00 80.00 56.25 25.0% 19.21

The ranking of projects differs on the use of IRR or NPV measures. Which project should be selected? Why is the IRR ranking misleading?

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