Homework 19 Solution
6.5
To solve this using the ERR method, we discount all of the negative
net
cash flows to the start of the
project (Year 0) at the 6% MARR, compound all of the positive
net
cash flows to the end of the project
(Time 4) at the 6% MARR, then solve for the i* that makes the two economically equivalent.
There is only one negative net cash flow and it’s at Year 0:
0
P
$50,000
The net cash flows in Years 14 are all positive, so we compound all of them to Year 4:
4
F
$15,000 F A,6%,4
$9000
$74,619
Now we simply solve for the value of i* that turns a $50,000 investment into $74,619 in four years:
4
$50,000 1
i*
$74,619
4
$74,619
1
i*
1.4924
$50,000
1
4
i*
1.4924
1
0.105
10.5%
This is much closer to the 6% MARR than the IRR from the last homework, which was 13.122%. So
this is still a good project but it’s not quite as good as it looked based on the IRR.
6.6
This time, the net cash flows in Years 1 and 2 are negative and the net cash flows in Years 3 and 4 are
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 Fall '08
 Moore,L
 Cash Flow Statement, Net Present Value, Internal rate of return, Net Cash

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