An example on the PW, FW, AW, IRR, and B/C
An example on the PW, FW, AW, IRR, and B/C
Prepared by: Parisay, Date: Summer of 2003
An expansion to a business is under study. Four feasible alternatives are found with different cash flow during 10 years of the useful life of such expansion. The initial investment and estimated revenue for all four alternatives (I, J, K, and L) are listed in the following table. All numbers are in thousands.
1) Assuming that MARR=12%, rank these alternatives using a) present worth method, b) future worth method, c) annual worth method. Analyze the result obtained using different methods of ranking.
2) Assuming that MARR=5%, rank these alternatives using present worth method. Compare this ranking with the one in part (1).
3) Find IRR of each alternative. Rank alternatives using IRR method (MARR=5%). Compare this ranking with the one in part (2).
4) Rank the alternatives using Benefit-Cost Ratio method (MARR=5%). Compare this ranking with the one in part (3).
Cash flow for four alternatives I, J, K, and L
| |year | I | J | K | L |
| |0 |-1100 |-1000 |-1000 |-900 |
| |1 |180 |0 |260 |0 |
| |2 |175 |0 |260 |0 |
| |3 |170 |0 |260 |0 |
| |4 |165 |0 |260 |0 |
| |5 |160 |0 |260 |0 |
| |6 |155 |370 |0 |0 |
| |7 |150 |370 |0 |0 |
| |8 |145 |370 |0 |0 |
| |9 |140 |370 |0 |0 |
| |10 |135 |370 |0 |1375 |
| | | | | | |
|total, i=0 | |475 |850 |300 |475 |
Solution:
Question 1: i = 12%
PW(I) = -1100 +180(P|A, 12%, 10) -5(P|G, 12%, 10) = -184.27
PW(J) = -1000 +370(P|A, 12%, 5)(P|F, 12%, 5) = -243
PW(K) = -1000 +260(P|A, 12%, 5) = -62.7
PW(L) = -900 +1375(P|F, 12%, 10) = -457.25
FW(I) = PW(I)*(F|P, 12%, 10) = -572.34
FW(J) = -1000(F|P, 12%, 10), 370(F|A, 12%, 5) = -755.39
FW(K) = PW(K)*(F|P, 12%, 10) = -194.75
FW(L) = -900(F|P, 12%, 10) + 1375 = -1420.4
AW(I) = -1100(A|P, 12%, 10) +180 -5(A|G, 12%, 10) = -32.63
AW(J) = PW(J)*(A|P, 12%, 10) = -43.01
AW(K) = PW(K)*(A|P, 12%, 10) = -11.1
AW(L) = -900(A|P, 12%, 10) +1375(A|F, 12%, 10) = -80.93
CONCLUSION:
Question 2: i = 5%
PW(I) = -1100 +180(P|A, 5%, 10) -5(P|G, 5%, 10) = 131.7
PW(J) = -1000 +370(P|A, 5%, 5)(P|F, 5%, 5) = 254.96
PW(K) = -1000 +260(P|A, 5%, 5) = 125.54
PW(L) = -900 +1375(P|F, 5%, 10) = -55.89
CONCLUSION:
Question 3:
For alternative I:
If: i1 = 12% Then: PW(I)1 = -184.27; If i2 = 5% Then: PW(I)2 = 131.7
PW(I) 1 - PW(I)2 PW(I) 1 – 0
--------------------- = ------------------- conclusion: i = 7.92%= IRR(I)
i1 - i2 i1 - i
[pic]
For alternative L:
If: i1 = 12% Then: PW(L)1 = -457.25; If i2 = 5% Then: PW(L)2 = -55.89
PW(L) 1 - PW(L)2 i1 - i2
--------------------- = ------------------- conclusion: i = 4.02% = IRR(L)
PW(L) 1 – 0 i1 - i
[pic]
For alternative J:
-243 -254.96 -243 -0
----------------- = ------------- conclusion: i = 8.58% = IRR(J)
12 -5 12 - i
For alternative K:
-62.7 -125.54 -62.7 -0
----------------- = ------------- conclusion: i = 9.67% = IRR(K)
12 -5 12 - i
CONCLUSION:
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- present value and irr depauw university
- solutions for homework accounting 507 managerial
- rwj 7th edition solutions
- present value analysis
- an example on the pw fw aw irr and b c
- inflation cash flows and discount rates
- california state university northridge
- rapfam general info present worth
- economic analysis rowan university
Related searches
- type a b c d personality quiz
- type a b c d personality
- types of personalities a b c d
- personality types a b c d
- asphalt types a b c d
- medicare part a b c d explained
- personality types a b c d test
- matrix a b c calculator
- an example describing the functional perspective
- a b c in cursive
- difference between medicare a b c d
- b c alternators aircraft