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Ch#7 Practice Problem Solution

The document provides examples and solutions to problems involving calculating internal rates of return and net present values for investment projects. Several investment projects are presented with net cash flows over multiple years and students are asked to calculate values that would result in specific internal rates of return or determine which project should be selected based on a required minimum rate of return.

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988 views

Ch#7 Practice Problem Solution

The document provides examples and solutions to problems involving calculating internal rates of return and net present values for investment projects. Several investment projects are presented with net cash flows over multiple years and students are asked to calculate values that would result in specific internal rates of return or determine which project should be selected based on a required minimum rate of return.

Uploaded by

F0x123
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Fundamentals of Engineering Economics, 3rd ed.

2012

Chapter 7 SOLVED PROBLEMS


7.12) Consider an investment project with the following net cash flow: Year 0 1 2 3 Net Cash Flow -$1,500 X $650 X

What would be the value of X if the projects IRR is 10%? SOLUTION


PW(10%) $1,500 X ( P / F ,10%,1) $650( P / F ,10%, 2) X ( P / F ,10%,3) 0 1.6604 X $962.84 X $580

7.13) Consider an investment project with the following net cash flow:

Year 0 1 2 3 4

Net Cash Flow -$12,000 $2,500 $5,500 X X

What value of X if the projects IRR is 25%?

SOLUTION

PW(25%) $12,000 $2,500( P / F ,25%,1) $5,500( P / F ,25%,2) X ( P / A,25%,2)( P / F ,25%,2) 0 $6,480 0.9216 X X $7,031.25

Fundamentals of Engineering Economics, 3rd ed. 2012 7.20) Consider an investment project with the following net cash flow:

Year 0 1 2 3

Net Cash Flow -$3,000 $800 $900 X

Assume that the projects IRR is 10%. a) Find the value of X. b) Is this project acceptable at MARR = 8%?

SOLUTION (a) Since i* 10% and PW(10%) 0 , we have

PW(10%) $3,000 $800( P / F ,10%,1) $900( P / F ,10%,2) X ( P / F ,10%,3) 0 Solving for X yields

X $2,035 (b) Since IRR 8% , the project is acceptable.


7.23) You are considering a CNC machine. This machine will have an estimated service life of 10 years with a salvage value of 10% of the investment cost. Its expected savings from annual operating and maintenance costs are estimated to be $60,000. To expect a 15% rate of return on investment, what would be the maximum amount that you are willing to pay for the machine? SOLUTION

PW(15%) C $60, 000( P / A,15%,10) 0.1C ( P / F ,15%,10) 0 0.97528C $301,128 C $308, 760.56

Fundamentals of Engineering Economics, 3rd ed. 2012

7.35)

Consider the following two mutually exclusive alternatives:

n 0 1 2 3

Project A1 -$10,000 $5,000 $5,000 $5,000

Project A2 -$12,000 $6,100 $6,100 $6,100

a) Determine the IRR on the incremental investment in the amount of $2,000. b) If the firms MARR is 10%, which alternative is the better choice?

SOLUTION (a) IRR on the incremental investment: Net Cash Flow Project A1 Project A2 -$10,000 -$12,000 $5,000 $6,100 $5,000 $6,100 $5,000 $6,100
i* A2 A1 29.92%

n 0 1 2 3

A2 A1 -$2,000 $1,100 $1,100 $1,100

(b) Since it is an incremental simple investment, IRR A2-A1 29.92% 10% . Therefore, select project A2.

7.36) Consider the following two mutually exclusive alternatives:

n 0 1 2 3

A1 -$16,000 $7,500 $7,500 $7,500

A2 -$20,000 $5,000 $15,000 $8,000

a) Determine the IRR on the incremental investment in the amount of $4,000. (Assume that MARR is 10%) b) If the firms MARR is 10%, which alternative is the better choice?

Fundamentals of Engineering Economics, 3rd ed. 2012 SOLUTION (a) A2 A1 -$4,000 -$2,500 $7,500 $500

n 0 1 2 3

A1 -$16,000 $7,500 $7,500 $7,500

A2 -$20,000 $5,000 $15,000 $8,000

IRR A2 A1 13.08%

(b) Select Project A2.

7.37) Consider the following two mutually exclusive alternatives: n 0 1 2 3 Project A -$10,000 $5,500 $5,500 $5,500 Project B -$20,000 0 0 $40,000

The firms MARR is known to be 15%. (a) Compute the IRR of project B (b) Compute the PW of project A (c) Suppose that projects A and B are mutually exclusive. Using the IRR, Which project would you select? SOLUTION a) IRR B 25.99% b) PW(15%) A $10,000 $5,500( P / A,15%,3) $2,558 c) Incremental analysis: Net Cash Flow Project A Project B -$10,000 -$20,000 $5,500 0 $5,500 0 $5,500 $40,000 BA -$10,000 -$5,500 -$5,500 $34,500

n 0 1 2 3

Since IRR B A 24.24% 15%, select project B. 4

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