Ask whether the extra investment earns its keep
Incremental IRR evaluates the cash-flow difference between a higher-investment challenger and an acceptable lower-investment defender.
Period 0: −$15,000.00. This is the time-zero cash flow. Periods use the payment interval stated in the model.
The extra investment in B is justified relative to an acceptable A.
Order alternatives by increasing initial investment and establish an acceptable defender.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
What the model means
Order investments by increasing initial cost, establish an acceptable defender, and subtract defender cash flows from challenger cash flows at every date. The negative initial increment is the extra investment; later positive increments are its extra benefits or savings.
Build the calculation
For a conventional increment, ΔIRR≥MARR justifies the upgrade. If not, keep the defender. Repeat against the next candidate. Equal investment, negative later increments, or multiple sign changes may make an incremental IRR undefined or misleading; incremental PW at MARR remains the reliable value test.
Set up. Calculate. Explain.
Rebuild the starting scenario
Additional investment for B: 15000 $; Additional annual savings: 4000 $/year; MARR: 10 % per year; Number of years: 5 years. Calculate the incremental IRR in percent.
Setup hint
Order alternatives by increasing initial investment and establish an acceptable defender.
Open the visual solution
- Order alternatives by increasing initial investment and establish an acceptable defender.
- Subtract A from B consistently at every date, including salvage.
- Solve incremental PW = 0; for this conventional increment ΔIRR ≥ MARR agrees with ΔPW ≥ 0. If the increment is nonconventional, use incremental PW.
Period 0: −$15,000.00. This is the time-zero cash flow. Periods use the payment interval stated in the model.
The extra investment in B is justified relative to an acceptable A.
Order alternatives by increasing initial investment and establish an acceptable defender.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.
Transfer the idea to a new scenario
Upgrading costs an additional $12,000 and saves an additional $3,000 per year for six years. Find incremental IRR and compare with MARR 9%.
Setup hint
Order alternatives by increasing initial investment and establish an acceptable defender.
Open the visual solution
- Order alternatives by increasing initial investment and establish an acceptable defender.
- Subtract A from B consistently at every date, including salvage.
- Solve incremental PW = 0; for this conventional increment ΔIRR ≥ MARR agrees with ΔPW ≥ 0. If the increment is nonconventional, use incremental PW.
Period 0: −$12,000.00. This is the time-zero cash flow. Periods use the payment interval stated in the model.
The extra investment in B is justified relative to an acceptable A.
Order alternatives by increasing initial investment and establish an acceptable defender.
Cash-flow dates and signs are part of the answer. Model values retain precision; displays round money to cents. Illustrative assumptions exclude taxes and inflation unless stated.
Checks allow 0.1% numerical rounding (minimum $0.05 or 0.001 in the stated nonmonetary unit). Interpolated factors and rates are approximations; keep table precision consistent.
If a conventional incremental IRR is below MARR, what follows?
Can you defend your setup?
Can you place each amount on the timeline, match the interest period, calculate the equivalent quantity, and state the decision or limitation?
Completion is saved on this browser.