ERR to select best proposal A or B

ERR is found by compounding receipts to the end of year 6 at ε = 25% and discounting expenditures to year 0 at ε, then solving for i'. Select by the incremental ERR compared with MARR = 20%.

Proposal A:

• Receipts compounded to year 6 at ε: FW(R) = 2,620(3.0518) + 2,900(2.4414) + 3,020(1.9531) + 3,100(1.5625) + 3,100(1.2500) + 2,600(1.0000) = 32,293
• Expenditures discounted to year 0 at ε: PW(E) = 6,400(1.0000) = 6,400
• ERR: 6,400(1 + i')^6 = 32,293 → (1 + i') = (5.0458)^(1/6) → ERR = 30.96%

Proposal B:

• Receipts compounded to year 6 at ε: FW(R) = 2,050(3.0518) + 4,060(2.4414) + 4,000(1.9531) + 3,900(1.5625) + 3,500(1.2500) + 3,400(1.0000) = 37,849
• Expenditures discounted to year 0 at ε: PW(E) = 7,550(1.0000) = 7,550
• ERR: 7,550(1 + i')^6 = 37,849 → (1 + i') = (5.0132)^(1/6) → ERR = 30.82%

Both ERRs (30.96% and 30.82%) exceed MARR = 20%, so both are acceptable. B needs more investment, so test the increment.

Incremental (B - A)

Cash flows: [-1150, -570, 1160, 980, 800, 400, 800] ERR(B - A) = 28.69% > MARR 20%

Answer: Select Proposal B, because its extra investment of Rs. 1,150 earns 28.7% which exceeds MARR = 20%.