An engineer in charge of the design of a plant must choose either a batch or a c
ID: 2780131 • Letter: A
Question
An engineer in charge of the design of a plant must choose either a batch or a continuous system. The batch system offers a lower initial outlay but, owing to higher labor requirements, exhibits a higher operating cost. The cash flows relevant to this problem have been estimated as follows:
Check the values given for the IRR and the net present worth. If the company requires a minimum rate of return of 10%, which system should be chosen?
Net Present worth at 10% Year IRR 0 Batch System($20,000.0) ($30,000.0) Reocurring Yr 1-10 $5,600.0 $7,650.0 25% 22% $14,400 $17,000 ContinuousExplanation / Answer
Year
Cashflows for Batch System
Cashflow for continuous system
0
-20000
-30000
1
5600
7650
2
5600
7650
3
5600
7650
4
5600
7650
5
5600
7650
6
5600
7650
7
5600
7650
8
5600
7650
9
5600
7650
10
5600
7650
Discount rate
NPV for Batch system
NPV for continuous system
10%
$13,099.61
$15,459.94
IRR
25%
22%
Please see the excel calculation as below:
Year
Cashflows for Batch System
Cashflow for continuous system
0
-20000
-30000
1
5600
7650
2
5600
7650
3
5600
7650
4
5600
7650
5
5600
7650
6
5600
7650
7
5600
7650
8
5600
7650
9
5600
7650
10
5600
7650
Discount rate
NPV for Batch system
NPV for continuous system
10%
$13,099.61
$15,459.94
IRR
25%
22%
The cashflows for each of the year can also be inserted in the BA II Plus calculator and NPV can be calculated.
As seen above the NPVs are wrong, though the IRRs are correct.
The system that must be chosen is Continuous system as it has higher NPV of $15460 than Batch System NPV of $13100.
We select project with higher NPV as it factors in discount rates and gives current value of any project whereas IRR is the percentage of return when NPV is Zero.
IRR for both the projects is greater than required return of 10% but NPV is considered better of the two.
The Net Present worth or value given here in the question is wrong for both the plants.Please see the excel calculation as below:
Year
Cashflows for Batch System
Cashflow for continuous system
0
-20000
-30000
1
5600
7650
2
5600
7650
3
5600
7650
4
5600
7650
5
5600
7650
6
5600
7650
7
5600
7650
8
5600
7650
9
5600
7650
10
5600
7650
Discount rate
NPV for Batch system
NPV for continuous system
10%
$13,099.61
$15,459.94
IRR
25%
22%
The cashflows for each of the year can also be inserted in the BA II Plus calculator and NPV can be calculated.
As seen above the NPVs are wrong, though the IRRs are correct.
The system that must be chosen is Continuous system as it has higher NPV of $15460 than Batch System NPV of $13100.
We select project with higher NPV as it factors in discount rates and gives current value of any project whereas IRR is the percentage of return when NPV is Zero.
IRR for both the projects is greater than required return of 10% but NPV is considered better of the two.
The Net Present worth or value given here in the question is wrong for both the plants.
Please see the excel calculation as below:
Year
Cashflows for Batch System
Cashflow for continuous system
0
-20000
-30000
1
5600
7650
2
5600
7650
3
5600
7650
4
5600
7650
5
5600
7650
6
5600
7650
7
5600
7650
8
5600
7650
9
5600
7650
10
5600
7650
Discount rate
NPV for Batch system
NPV for continuous system
10%
$13,099.61
$15,459.94
IRR
25%
22%
The cashflows for each of the year can also be inserted in the BA II Plus calculator and NPV can be calculated.
As seen above the NPVs are wrong, though the IRRs are correct.
The system that must be chosen is Continuous system as it has higher NPV of $15460 than Batch System NPV of $13100.
We select project with higher NPV as it factors in discount rates and gives current value of any project whereas IRR is the percentage of return when NPV is Zero.
IRR for both the projects is greater than required return of 10% but NPV is considered better of the two.