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INEN625G Homework 2 2010 Solution

# INEN625G Homework 2 2010 Solution - INEN625 Graduate...

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INEN625 Graduate Homework 2 Due 2/10/10 Answer the following questions using your own words . Submit one typed copy for your project group. All members who contribute should sign the cover page. 1. Consider five projects that may be undertaken. Projects A and C are mutually exclusive. If projects B and C are correlated and if both done together will result in a total NPV increase of \$80,000. Determine the optimal set of projects if only \$2,000,000 is available in capital. Prove your solution. Project Project Cost Net Present Value A \$1,000,000 \$200,000 B \$500,000 \$120,000 C \$800,000 \$180,000 D \$900,000 \$180,000 E \$200,000 \$90,000

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B and C Together Total Combinations A B C D E Cost NPV Added NPV NPV AB 1 1 0 0 0 \$1,500,000 \$320,000 \$0 \$320,000 AC Not feasible because A and C mutually exclusive AD 1 0 0 1 0 \$1,900,000 \$380,000 \$0 \$380,000 AE 1 0 0 0 1 \$1,200,000 \$290,000 \$0 \$290,000 BC 0 1 1 0 0 \$1,300,000 \$300,000 \$80,000 \$380,000 BD 0 1 0 1 0 \$1,400,000 \$300,000 \$0 \$300,000 BE 0 1 0 0 1 \$700,000 \$210,000 \$0 \$210,000 CD 0 0 1 1 0 \$1,700,000 \$360,000 \$0 \$360,000 CE 0 0 1 0 1 \$1,000,000 \$270,000 \$0 \$270,000 DE 0 0 0 1 1 \$1,100,000 \$270,000 \$0 \$270,000 ABC Not feasible because A and C mutually exclusive ABD 1 1 0 1 0 \$2,400,000 Over budget ABE 1 1 0 0 1 \$1,700,000 \$410,000 \$0 \$410,000 ACD Not feasible because A and C mutually exclusive ACE Not feasible because A and C mutually exclusive ADE 1 0 0 1 1 \$2,100,000 Over budget BCD 0 1 1 1 0 \$2,200,000 Over budget BCE 0 1 1 0 1 \$1,500,000 \$390,000 \$80,000 \$470,000 Maximum NPV is \$470,000 by doing BC and E BDE 0 1 0 1 1 \$1,600,000 \$390,000 \$0 \$390,000 CDE 0 0 1 1 1 \$1,900,000 \$450,000 \$0 \$450,000 ABCD Not feasible because A and C mutually exclusive ABCE Not feasible because A and C mutually exclusive ABDE 1 1 0 1 1 \$2,600,000 Over budget ACDE Not feasible because A and C mutually exclusive BCDE 0 1 1 1 1 \$2,400,000 Over budget ABCDE Not feasible because A and C mutually exclusive
2. Describe why Information Systems present a challenge in terms of economic justification. List ways you might overcome these challenges. Use at least three external references.

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INEN625G Homework 2 2010 Solution - INEN625 Graduate...

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