]
480 SELECTIONOF A MINIMUM ATTRACTIVERATEOF RETURN
Consider the two following alternatives:the MARR of Alt.Bhas been raised from 10% to 15%
to take into account the greater risk and uncertainty that Alt.B'sresults may not be as favorable
as indicated. What is the impact of this change of MARR on the decision?
Year
o
1-10
11-20
Alt.A
-$80
10
20
Alt.B
-$80
13.86
10
. Computations at MARR of 10% Ignoring R.isk ~d Uncertainty.
Both alternatives have the same positive NPW (+$28.83) at,a MARR o~10%. Also, the differences
in the benefits schedules (A - B) produce a...10% increrp.ental rate of.rettlrn. (The calculations
are qot shown here.) This must be tr'ueifNPW for the two alternatives is totemaJ,n constant at a
MARR of 10%.
I
L~
I
Considering Risk.and Uncertainty with MARR of 10% I
Ai 10% ,both alternatives are equally desirable. Since Alt. Bis believed topave greater. risk arid ~t
uncertainty, a logical conclusion is to select Alt.Arather tpanB. 1
a e j
t .. 'n::Cre:a~iMA.RR ta15% "'::;: =!: = "" ~ '"' ...~::: :::::: = ~~ :=-='-~ == = ...,
A
.
t.a
.
:1\1
.
.
...
ARR
.
of 15
..%,A.
lt
.
.
.
A
..
.
.
ha
.
s a ne
.
.
.
ga
.
tiv
..
e NPWand
..
Alt. B
..
has a.positive NPW
.
.A
.
71
.
tematiyeJ3is
p~eferred.qn<ler tl1ese..cir~mrp.stance?:: .!ii!.'! ~ ~ '" >; ~ ~::: ==='1:1=_11 oil ~ :;;:;;~ =...,J
.-1000... 11\II,\:>::1 _ __. III _ , A
NPW
Year Alt.A At 14.05% At 10% At 15%
(^0) -$80 -$80.00 -$80.00 -$80.00
1-10 10 52.05 61.45 50.19
11-20 20 27.95- 47.38 24.81
(^0) +28.83 --5.00
.
NPW
Year Alt. (^8) At 15.48% At 10% At 15 %
(^0) -$80 -$80.00 -$80.00 -$80.00
1-10 3.86 68.31 85.14 69.56
11....20 (^0) 11.99- 23.69 12.41
(^0) +28.83 +1.97