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The Connecticut Department of Transportation is considering two designs for crash barriers along a portion of I-84. Design 2B will cost $3 million to install and $120,000 per year to maintain. Design 4R will cost $3.5 million to install and $80,000 per year to maintain. Perform an incremental rate of return analysis to determine which design is preferred, if CTDOT uses a MARR of 6% per year and a 20-year project period.

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jepessoa

Answer:

Design 4R should be chosen

Explanation:

incremental rate of return analysis

                                        Design 2B          Design 4R     Differential amount

initial outlay                     $3,000,000       $3,500,000      -$500,000

cash flows 1 - 20               $120,000            $80,000           $40,000

Using an excel spreadsheet or financial calculator, you must find the IRR of the differential amount = 4.96%. This means that the costs of design 4R are 4.96% cheaper than the costs of Design 2B.

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