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  • Chapter 6 Homework - Motaman Alquraish

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    Maddah Hussain
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    The problem presents three investment alternatives A, B, and C with different initial costs, annual benefits, and useful lives. It asks to construct a choice table comparing the net present value of each alternative across interest rates from 0% to 100%. Based on the internal rates of return, alternative C has the highest IRR of 21.60% and should be selected over A or B.

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    Chapter 6 Homework- Motaman Alquraish

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    The problem presents three investment alternatives A, B, and C with different initial costs, annual benefits, and useful lives. It asks to construct a choice table comparing the net present value of each alternative across interest rates from 0% to 100%. Based on the internal rates of return, alternative C has the highest IRR of 21.60% and should be selected over A or B.

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    © All Rights Reserved
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    282 views9 pages

    Chapter 6 Homework - Motaman Alquraish

    Uploaded by

    Maddah Hussain
    The problem presents three investment alternatives A, B, and C with different initial costs, annual benefits, and useful lives. It asks to construct a choice table comparing the net present value of each alternative across interest rates from 0% to 100%. Based on the internal rates of return, alternative C has the highest IRR of 21.60% and should be selected over A or B.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
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    of 9

    7-12 Compute the rate of return on the following investment.

    Year Cash Flow

    0 − $8000
    1 $ -
    2 $ 2,600.00
    3 $ 2,600.00
    4 $ 2,600.00
    5 $ 2,600.00

    Solution

    Year
    0 -8000
    1 0
    2 2600
    3 2600
    4 2600
    5 2600
    IRR 7.90%
    7-25 For Problem 7-7, graph the PW versus the interest rate for values from 0% to 50%. Is this the typical PW graph for an inv

    Solution

    Year Cash Flow


    0 -5000
    1 1500 Chart Title
    2 1500 $3,000.00
    3 1500
    4 1500 $2,000.00
    5 1500
    IRR 15.24% $1,000.00

    $-
    Interest Rate 0% 10% 20% 30% 40%
    0% $ 2,500.00
    $(1,000.00)
    10% $ 686.18
    20% $ (514.08) $(2,000.00)
    30% $ (1,346.65)
    40% $ (1,947.25) $(3,000.00)
    50% $ (2,395.06)
    typical PW graph for an investment?

    Title

    30% 40% 50%


    Two investment opportunities are as follows:
    A B
    First cost $200 $100
    Uniform annual benefit 25 20
    End-of-useful-life salvage value 45 0
    Useful life, in years 15 10
    At the endAt
    ofthe
    10 end
    years,
    of Alt. B is
    10 years,not
    Alt.replaced.
    B is not Thus,
    replaced.
    the comparison
    Thus the comparison
    is 15 years of A versus 10 years of B. If the MARR is 8%, which alte

    Solution
    Cash Flow
    Year A B A-B
    0 -200 -100 -100
    1 25 20 5
    2 25 20 5
    3 25 20 5
    4 25 20 5
    5 25 20 5
    6 25 20 5
    7 25 20 5
    8 25 20 5
    9 25 20 5
    10 25 20 5
    11 25 25
    12 25 25
    13 25 25
    14 25 25 B should be selected
    15 70 70
    IRR 10.08% 15.10% -10.96%
    the MARR is 8%, which alternative should be selected?
    8.9 The South End bookstore has an annual profit of $285,000. The owner may open a new bookstore by leasing an
    existing building for 5 years with an option to continue the lease for a second 5-year period. If he opens “The North End,” it
    will take $950,000 of store fixtures and inventory. He believes that the two stores will have a combined profit of $395,000
    a year after all the expenses of both stores have been paid.
    The owner’s economic analysis is based on a 5-year period. He will be able to recover $750,000 at the end of 5 years by
    selling the store fixtures and moving the inventory to The South End.
    (a)Construct a choice table for interest rates from 0% to 100%.
    (b)If The North End is opened, what rate of return can he expect?

    South North
    First Cost 0 950000
    Annual Benefit 285000 110000
    Salvage Value 0 750,000
    Useful Life 5 5

    Year A B Interest Rate


    0 0 -950,000 0% $ 350,000.00
    1 285000 110000 10% $ (67,322.46)
    2 285000 110000 20% $ (319,624.49)
    3 285000 110000 30% $ (480,090.52)
    4 285000 110000 40% $ (586,681.14)
    5 285000 860,000 50% $ (660,205.76)
    7.99% Irr 60% $ (712,625.12)
    70% $ (751,102.43)
    80% $ (780,085.18)
    90% $ (802,424.28)
    100% $ (820,000.00)
    bookstore by leasing an
    If he opens “The North End,” it
    combined profit of $395,000
    00 at the end of 5 years by
    Each alternative has a 10-year useful life
    and no salvage value. Construct a choice
    table for interest rates from 0% to 100%, if
    doing nothing is allowed.
    A B C

    Initial cost $1,500 $1,000 $2,035

    Annual
    benefit 250 250 650
    17 for
    first 5
    years
    Annual
    benefit 450 250 145
    for

    subseque
    nt 5 years

    Year A B C Interest Rate A B


    0 -1500 -1000 -2035 0% $ 2,000.00 $ 1,500.00
    1 250 250 650 10% $ 2,256.90 $ 536.14
    2 250 250 650 20% $ 1,538.49 $ 48.12
    3 250 250 650 30% $ 1,154.08 $ (227.12)
    4 250 250 650 40% $ 929.07 $ (396.61)
    5 250 250 650 50% $ 787.07 $ (508.67)
    6 450 250 145 60% $ 891.63 $ (587.12)
    7 450 250 145 70% $ 824.08 $ (644.63)
    8 450 250 145 80% $ 774.16 $ (688.38)
    9 450 250 145 90% $ 735.94 $ (722.68)
    10 450 250 145 100% $ 705.81 $ (750.24)
    IRR 16.31% 21.41% 21.60%
    C
    $ 1,940.00
    $ 770.31
    $ 83.17
    $ (356.76)
    $ (657.27)
    $ (873.03)
    $ (1,034.13)
    $ (1,158.27)
    $ (1,256.41)
    $ (1,335.70)
    $ (1,400.92)

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