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Homework 19 Solution

# Homework 19 Solution - Homework 19 Solution 6.5 To solve...

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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 1-4 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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