following cash flow estimates have been developed for two small, mutually exclus
ID: 1112349 • Letter: F
Question
following cash flow estimates have been developed for two small, mutually exclusive investment The minimum attractive rate of return is 15% per year. alternatives. End of Year » Alternative 1 4 -$2,500 750 750 750 750 2,750 Alternative 2 $4,000 1,200 1,200 1,200 1,200 3,200 At which of the following IRR values on incremental investment would alternative 1 be a better choice? A. 12% 06. B. 15% C. 18% D. 28% E. 25% Decision criterion: At which of the following IRR values on incremental investment would A. 5% 07. alternative 2 be a better choice? B. 10% C. 10% D. 12% E. 18% Decision criterion: A machine cost $50,000 on January 1,2010, and $100,000 on January 1,2015. The average inflation rate over the five years was 5% per year. What is the true percentage increase in the cost of the machine from 2010 to 2015? A. 100% 08. C. 63.9% D. 56.7% E. 9.4% B. 72.4% Formula Used:Explanation / Answer
The incremental cash flows for 2 - 1 have a present value = -1500 + 450(P/A, i%, 5)
Hence for Question 6, correct values are 12% because then IRR is smaller than MARR. Hence option A is correct
For question 7, Option E is correct because IRR is greater than MARR.
For question 8, Option D is correct
Market rate of interest is 100000 = 50000*(1+i%)^5 which gives i = 14.86 per year. Inflation rate is 5% so inflation free rate of interest is 9.39%. Now for five years, this rate of interest becomes (1+9.39%)^5 - 1 = 56.63%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.