The city of Iceville has a capital budget (for initial costs only) of $150,000 f

Question

The city of Iceville has a capital budget (for initial costs only) of $150,000 for its local ice hockey team arena. It is considering the following 5 projects for improvements: (A) New lights (B) Installing new seats (C) New Zamboni machine (D) Renovating the beer stand (E) New locker rooms

The cost and savings/revenues are as follows: The cost is a one-time cost now, and the savings/revenues are recurring every year over the duration of the project. MARR is 15%.

a. Which projects should Iceville invest in?

b. What is the de facto MARR?

Projects Intial cost Savings/revenues(annual) Duration(years) A 75,000 20,000 5 B 60,000 18,000 8 C 56,000 29,000 4 D 30,000 12,000 4 E 38,000 28,000 2

Explanation / Answer

Iceville should invest in projects with the highest NPVs within the budget constraint of $150000.

Iceville should invest in Projects B, C & D as they combinely have the highest NPVs.

Project A

Project B

Project C

Project D

Project E

The defacto MARR is the MARR at which the NPV of a project is zero.

Through trial and error, we can find that the defacto MARR for: (approximately)

Project A is 10.424%

Project B is 24.951%

Project C is 37.149%

Project D is 21.862%

Project E is 30.253%

Year Cashflow MARR Present Value NPV 0 -75000 15% -75000.00 -$7,956.90 1 20000 15% 17391.30 2 20000 15% 15122.87 3 20000 15% 13150.32 4 20000 15% 11435.06 5 20000 15% 9943.53

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