orie_451_homework_3_2008 - 4,000,000 5,100,000 Salvage...

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ORIE 451/551 Homework #3 Due February 15, 2008 Show your work and explain your answers. Answers in the back of the book are very likely incorrect. Please use the methods developed in lecture and in section. Please contact the instructor if you have questions. Instructor e mail: [email protected] Instructor phone: 607-339-7420 Instructor office: 426 Rhodes Hall (may also be in breakout rooms or lounge on 4 th floor) Formal office hours: 3:00 to 4:30 PM Monday, 3:00 to 3:55 PM Wednesday. Feel free to stop by at any time. 1. Three mutually exclusive alternatives are being considered at a paper towel factory. The company’s MARR is 20%. Ignoring depreciation and taxes, which project, if any , should be selected? Project A Project B Project C Initial investment $2,000,000 $4,200,000 $7,000,000 Annual revenues 3,200,000 6,000,000 8,000,000 Annual costs 2,100,000
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Unformatted text preview: 4,000,000 5,100,000 Salvage value 100,000 420,000 600,000 Useful life (years) 6 8 8 2. Calculate the IRR for the mixed cash flow stream below. The external rate of return is 15%. Use the method demonstrated in lecture and in section. Time CF-2000 1 3600 2-1500 3 1000 4-2500 5 400 6 800 7 400 8 1000 3. A new machine to make lithium ion batteries costs $35,000. It generates an annual cash flow of $10,000. At the beginning of year 5, it must be refurbished, which will cost $20,000. The life is 10 years. At the end of its life, the machine must be disposed of, which, due to the toxic chemicals built up on the machine, will cost $25,000. The external rate of return is 12%. Find the IRR of the machine. Hint: Be careful with how you record the refurbishment cost. Textbook Problems 6-34, 6-39, 6.53, 6.56...
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