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Module23HWSol

# Module23HWSol - Module 23 Chapter 14 D2 a None of the...

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Module 23 Chapter 14 D2 a) None of the projects are dominated. Alterative 2 has the best PW(15%) but worst payback. Alternative 3 has the best payback, but worst PW(15%). Alternative 1 is not dominated by alternative 3 (better PW(15%)) and alternative 2 (better payback). b) Alternatives 1 and 3. c) Alternative 1: 481 . 0 3 2 6 1 544 20 6 2 1000 716 6 3 Alternative 3: 423 . 0 2 2 6 1 40 20 6 2 1000 179 6 3 Alternative 1 is the best option. d) Alternative 1: 0 1 )] ( [ ] 544 05 . 0 716 ) 05 . 0 ( 2 [ 5 . 0 2 2 e x U E Alternative 3: 999 . 0 1 )] ( [ ] 40 05 . 0 179 ) 05 . 0 ( 2 [ 5 . 0 2 2 e x U E Alternative 3 is the best option. D5 a) AEC A = \$500K (A/P, 9%, 8) + \$400K + \$50K (A/F, 9%, 8) = \$485,803 AEC B = \$350K (A/P, 9%, 6) + \$450K (A/A 1 , 3%, 9%, 6) = \$559,572 The decision is to select asset A. The difference in AEC, AEC B - AEC A = \$559,572 - \$485,803 = \$73,768. Suppose there is a 30% error in investment: AEC A = \$500K (1+0.3) (A/P, 9%, 8) + \$400K + \$50K (A/F, 9%, 8) = \$512,905 AEC B = \$350K (1+0.3) (A/P, 9%, 6) + \$450K (A/A 1 , 3%, 9%, 6) = \$582,978 AEC B - AEC A = \$582,978 - \$512,905 = \$70,073 Error = (\$70,073 - \$73,768) / \$73,768 = -5.01%

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Repeating for other error values, we get the following sensitivity analysis results for AEC B - AEC A : Error Investment Initial O&M Increase rate -30% 5.01% -33.16% -13.2% -15% 2.50% -16.58% -6.62% 0% 0% 0% 0% 15% -5.01% 33.16% 6.70% 30% -2.50% 16.58% 13.47% b) Let n* be the breakeven number of batches. Setting AEC
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Module23HWSol - Module 23 Chapter 14 D2 a None of the...

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