B1 82 B2 – BI -$3,000 -$12,000 --$9,000 1 $1,350 $4,200 $2,850 2 $1,800 $6,225 $4,425 3 $1.500 $6,330 $4,830 IRR 25% 17.43%
John Covington, a college student, wants to start a small-scale painting business during his off-school hours. To economize the start-up business, he decides to purchase some used painting equipment. He has two mutually exclusive options: (B1) Do most of the painting by himself by limiting his business to only residential painting jobs or (B2) purchase more painting equipment and hire some helpers to do both residential and commercial painting jobs. He expects option B2 will have a higher
equipment cost but provide higher revenues as well. In either case, he expects to fold the business in three years when he graduates from college.
The cash flows for the two mutually exclusive alternatives are given as follows:
With the knowledge that both alternatives are revenue projects, which project would John select al MARR = 10%? (Nole that both projects are profitable at 10%.)
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