ISE 460
Fall 2006
GEZA BOTTLIK
MIDTERM No. 2 Solution
11/09/06
Problem No. 1
You are to select between projects A and B. You got stuck working in a place that uses IRR as
the criterion for determining the selection of projects. The cash flows are shown below together
Which project would you select ? (MARR = 7%) Show any calculations and explain your
answer. (10 points):
Project
A
B
Investment
($160,000)
($192,000)
First year Income
$30,000
$40,000
Second Year Income
$60,000
$30,000
Salvage value
$100,000
$160,000
MARR
7%
IRR
7.6%
7.5%
Assuming that the salvage occurs in at the end of year 2:
Project
A
B
Difference
Investment
($160,000)
($192,000) ($32,000)
First year Income
$30,000
$40,000
$10,000
Second Year Income
$60,000
$30,000
($30,000)
Salvage value
$100,000
$160,000
$60,000
MARR
7%
IRR
7.6%
7.5%
13.7%
NPV
$7,788
$11,337
And one would choose B
If we assume that the salvage value occurs in year 3:
Project
A
B
Difference
Investment
($160,000)
($192,000) ($32,000)
First year Income
$30,000
$40,000
$10,000
Second Year Income
$60,000
$30,000
($30,000)
Salvage value
$100,000
$160,000
$60,000
MARR
7%
IRR
7.6%
7.5%
7.1%
NPV
$2,074
$2,194
$121
The answer is still B
Problem No. 2
- Short questions (show your work or source of your answer) (5 points each)
a) The annual equivalent of a present value of
$2,000,000 over a period of 8 years at 5 % is
$309,444. It’s easiest to use the tables 2,000,000(A/P,5%,8 years) or Excel’s PMT function