Show all your work 1. A company is considering an investment that would be the e
ID: 2799363 • Letter: S
Question
Show all your work 1. A company is considering an investment that would be the expected cash flows of $20,000 in year 1 (a single receipt), and between years 5-10 (including those years-6 receipts), the amounts would be $25,000 in year 5, decreasing by $2,500 each year through year 10, ($22,500 in year 6, $20,000 year 7, etc.). If the MARR is 6% per year compounded quarterly, would you undertake the project? Please explain the reasons with the numerical analysis. 2. A hydroelectric dam is expected to cost for $50 million initially. The overhaul cost can be categorized in two different categories. The major overhaul is expected $10 M every 7 years, and the minor overhaul costs are $2 million every 3 years. Apart from the overhaul costs operating and maintenance costs are $1 million every year. What would be the annualized cost of the hydroelectric dam, if the life of the dam is expected to last indefinitely? Assume the MARR is 10% per year 3. The cash flows associated with the two projects are given below. Project A 50,000 $15,000 Project B $68,000 $18,000 $3500 Initial Cost Annuat Cest years 1-5) Salvage value $500 What would be incremental rate of return (Hint: Consider the time value of money, and the total differences Considering the MARR of 10%, per year which project do you choose? If DN option exists, would your decision to Part B change? Why? a. b. c.Explanation / Answer
MARR is 6% per year but compounded quarterly so, we need to calculate MARR per year but compounded annually
So, Quarterly rate = 6%/12*3 = 1.5%
Or, annual rate = {(1+rate %) ^4-1}
Or, annual rate = {(1+0.015) ^4-1} = 6.15% (approx) compounded annually
Cash Flows in Year1 = $20,000
Cash Flows in Year5 = $25000
Cash Flows in Year6 = $22500
Cash Flows in Year7 = $20000
Cash Flows in Year8 = $17500
Cash Flows in Year9 = $15000
Cash Flows in Year10 = $13500
Note: Decreasing by $2500 every year from Year6 onwards to Year10.
So, PV of these Cash Flows ($) = Cash Flows in Year1/ (1+ Modified Rate)^1 + Cash Flows in Year5/ (1+ Modified Rate)^5 +
Cash Flows in Year6/ (1+ Modified Rate)^6 +
Cash Flows in Year7/ (1+ Modified Rate)^7 +
Cash Flows in Year8/ (1+ Modified Rate)^8 +
Cash Flows in Year9/ (1+ Modified Rate)^9+
Cash Flows in Year10/ (1+ Modified Rate)^10
Or, NPV of these Cash Flows ($) = 20,000/(1.0615) + 25000/(1.0615)^5 + 22500/(1.0615)^6 + 20000/(1.0615)^7 + 17500/(1.0615)^8 + 15000/ (1.0615)^9 + 13500/ (1.0615)^10
Or, NPV of these Cash Flows ($) = 18841 + 18549.85 + 15727.60 + 13170.13 + 10856.20 + 8766.20 + 7432.50 = $93343.50
So the PV of the project is $93343.50 and if the Initial Investment is lower than the PV value of the Cash Flows then the project should be accepted. We do not have the Initial Investment as the single receipt in Year1 has been considered as an inflow and not an outflow (since with years 6-10 it is mentioned as an receipt and for the first year also it is mentioned as a receipt).