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Final_ISE460_SP06_sol

# Final_ISE460_SP06_sol - ISE 460 Spring 2006 FINAL Solution...

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Unformatted text preview: ISE 460 Spring 2006 FINAL 05/03/06 Solution Problem No. 1 A typical project analysis sheet is shown below. In what year will the MARR be achieved for the first time? Assume that there are several other profitable projects in this company. Show your work (25 points). To solve the problem, compute taxes and cash flow one year at a time and calculate the NPV up to and including that year. These calculations are shown in blue. Note that when you reach the third year, the NPV becomes positive, so the answer is the third year . Tax Rate Use the tax table MARR 15% MACRS 3 Investment \$60,000 Year 1 2 3 4 5 Income 27,000 \$ 28,000 \$ 29,000 \$ 30,000 \$ 31,000 \$ Depreciation \$19,998 \$26,670 \$8,886 \$4,446 Taxable Income \$7,002 \$1,330 \$20,114 \$25,554 \$31,000 Income Taxes \$1,050 \$200 \$3,017 Cash Flow Net Income \$5,952 \$1,131 \$17,097 Depreciation \$19,998 \$26,670 \$8,886 \$4,446 Investment (\$60,000) Net Cash (\$60,000) \$25,950 \$27,801 \$25,983 NPV (\$37,435) (\$16,414) \$670 Page 1 ISE 460 SPRING 2006 GEZA BOTTLIK FINAL 05/03/06 Problem No. 2 A project manager conducted three separate simulations and different assumptions to determine the viability of a project. Which of the three scenarios has the best chance of guaranteeing that the net present value will be over \$10,000 if you assume that the NPV is distributed normally and considering the assumptions? Show your work and reasoning. (10 points) What if you assume that it is uniformly distributed? (5 points) If you were the CFO (Chief Financial Officer) of this corporation, would you approve going ahead with this project? Why? What other factors would you consider? (5 points) Case A (56,985 -10,000)/35,465 = 1.3 standard deviations. From the table P(>10,000) = 90% Case B (47,872 -10,000)/25,709 = 1.5 standard deviations. From the table P(>10,000) = 93% Case C (60,628 -10,000)/23,578 = 2.1 standard deviations. From the table P(>10,000) = 98% If this were the only criterion, Case C would be the clear answer. Let us look at the differences in assumptions; Unit Price Average \$60 Standard Deviation \$3 \$60 \$1 \$61 \$1 A has the most pessimistic outlook for the price, while C has the most optimistic. I think I will stick with C since the differences in assumptions are relatively small and we cannot rerun the simulation for the test. For uniform distribution: Case A (122,984 - 10,000)/( 122,984 - 35,465 ) = 100% because it has the larger minimum Case B (106,150 - 10,000)/(106,150 – 23,578) = 100% Case C (100,592 - 10,000)/( 100,592 – 6,589) = 96% If I were the CFO I would definitely go ahead with it, Only one analysis shows one small negative NPV, and that one has the most pessimistic assumptions. Other factors would be other available projects and my confidence in the various estimates, the available project managers and their records, prior experience with similar projects, my personal liking for the project’s content, etc....
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Final_ISE460_SP06_sol - ISE 460 Spring 2006 FINAL Solution...

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