The next two slides illustrates:
A 7 percent discount rate for the A Differential and a mix of 10 and 7 percent discount rates for the B Differential
Baseline costs (no investment) in the first column and the estimated costs for Alternatives A and B in the second column
A negative total discounted cash flow for both alternatives (i.e., an estimated cost reduction resulting from each investment)
Uniform annual difference or delta (net cash flows normalized to even) (total discounted cash flow divided by the total of the discount factors)
A 231.58 percent IRR on Alternative A relative to the baseline cost and a 224.53 percent difference between the discount rate and the IRR
A 27.97 percent IRR on Alternative B relative to the baseline cost and a 20.54 percent difference between the discount rate and the IRR
Less risk for Alternative A due to the eight times larger IRR (the same conclusion as the DoD example using risk adjusted NPV)
Copyright © 1991-1997, Ray Martin