## Answers

IRR is the minimum rate of return acceptable from a project. It can be calculated with the use of IRR function/formula of EXCEL/Financial Calculator. The basic function/formula for calculating IRR is given as below:

NPV = 0 = Cash Flow Year 0 + Cash Flow Year 1/(1+IRR)^1 + Cash Flow Year 2/(1+IRR)^2 + Cash Flow Year 3/(1+IRR)^3 + Cash Flow Year 4/(1+IRR)^4 + Cash Flow Year 5/(1+IRR)^5 + Cash Flow Year 6/(1+IRR)^6 + Cash Flow Year 7/(1+IRR)^7 + Cash Flow Year 8/(1+IRR)^8 + Cash Flow Year 9/(1+IRR)^9

IRR is calculated with the use of EXCEL as below:

where

**IRR (Alt. A)** = IRR(B3:B14) = **26.29%**

**IRR (Alt. B)** = IRR(C3:C15) = **17.04%**

_____

Based on the above calculations, * it can be concluded that the increment in cost from A to B is not justified*.

It is because, even though both the alternatives provide IRR greater than MARR, IRR of alternative A is higher than that of alternative B.