ENGR 111 Fall 2011 Homework 3 (1)

ENGR 111 Fall 2011 Homework 3 (1) - ENGR 111 Fall 2011...

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ENGR 111 Fall 2011 HOMEWORK 3 Due (SHARP): Nov 14, 2011 5pm. Make sure that you upload the correct file. You are responsible for uploading corrupted/wrong version etc. files. Please factor in any possible technical difficulties and submit your file ahead of time. 1.(1.5 points) Your Company is considering two new projects, X and Y, with different cash streams. Project X provides a cash flow of $9000 each year starting 3 years from today. Future cash flows of X grow by 4% in perpetuity. Project Y’s cash flow is -12,000 each year starting two years from today, and will continue in perpetuity. The discount rate is 12%. What is the present value of each stream? If we combine the two projects into one stream, what is the IRR of this new project? What is the correct IRR rule for the project? How does this rule change if Project Y has a one time extra -10,000 cash flow 20 years from today? 2. (1.5 points) You are asked to chose between two mutually exclusive projects. The annual rate of return is 14%. For both projects cash streams begin today (period zero) if you undertake them. For the first project the cash stream is: -$750, $310,$430,$330 For the second project cash stream is: -$2100, $1200, $760, $850 If your decision rule is to accept the project with the greater IRR, which project should you choose? Now, considering the scale problem, you decide to use the incremental cash flow approach. Which project would you choose now? Compare your decision to the decision you would have made using NPV approach. 3. (2 points) Suppose we are thinking about replacing an old machine with a new one. The old one cost us $650,000; the new one will cost $780,000. The new machine will be
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ENGR 111 Fall 2011 Homework 3 (1) - ENGR 111 Fall 2011...

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