15-28 Each of the following 10 independent projects has a 10-year life and no sa

Question

15-28 Each of the following 10 independent projects has a 10-year life and no salvage value. Uniform Annual Benefits Rate of Project (thousands) (thousands) Return $ 50 150 100 300 50 200 50 200 50 100 $10.3 32.2 17.7 48.8 11.9 38.3 10.0 36.9 11.5 22.3 16% 17 12 10 20 4 15 13 19 18 10 The projects have been proposed by the staff of the Ace Card Company. The MARR of Ace has been (a) If there is ample money available, what projects (b) Rank-order all the acceptable projects according (c) If only $450,000 is available, which projects (d) Are the results the same if the projects are ranked 12% for several years. should Ace approve? to desirability using NPW/cost. should be approved? on IRR? What is the opportunity cost of capital?

Explanation / Answer

(a) If there is ample money, all projects except project 4 can be approved, as project 4 does not meet the required rate of return.

(b)

(c) The projects to be chosen are, in order of desirability, Project numbers 5, 9, 10, 2, 1 and 7.

(d)

Project Cost (1000s) Annual benefit Present value annuity factor Total benefit NPV NPV/Cost Rank 1 50 10.3 5.650225 58.1973 8.197297 16.39459
5 2 150 32.2 5.650225 181.9372 31.93718 21.29145 4 3 100 17.7 5.650225 100.0089 0.008948 0.008948 9 4 300 48.8 5.650225 275.7309 -24.2691 -8.08971 10 5 50 11.9 5.650225 67.23765 17.23765 34.47531 1 6 200 38.3 5.650225 216.4035 16.40354 8.201771 7 7 50 10 5.650225 56.50223 6.50223 13.00446 6 8 200 36.9 5.650225 208.4932 8.49323 4.246615 8 9 50 11.5 5.650225 64.97756 14.97756 29.95513 2 10 100 22.3 5.650225 126 25.99997 25.99997 3

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