460midterm2

460midterm2 - ISE 460 GEZA BOTTLIK MIDTERM No. 2 Solution...

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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
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This note was uploaded on 02/27/2008 for the course ISE 460 taught by Professor Bottlik during the Spring '06 term at USC.

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460midterm2 - ISE 460 GEZA BOTTLIK MIDTERM No. 2 Solution...

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