6-35. Three mutually exclusive investment alternatives are being considered. The estimated cash flows for each alternative are given below. The study period is 30 years and the firm’s MARR is 20% per year. (6.5.2)

Alt. 1 Alt. 2 Alt. 3 Capital investment –$30,000 –$60,000 –$40,000 Annual costs –$15,000 –$30,000 –$25,000 Annual revenues $28,000 $53,500 $38,000 Market value at end of useful life 10,000 10,000 10,000 Useful life 5 years 5 years 6 years IRR 36.9% 29.9% 26.0%

a. What is the simple payback period for Alternative 1?

b. What is the annual worth of Alternative 2?

c. What is the IRR of the incremental cash flows of Alternative 2 compared to Alternative 1?

d. Which alternative should be selected and why? State your assumptions.