02 The following cash flow estimates have been developed jor two small, matually
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02 The following cash flow estimates have been developed jor two small, matually exclusive investment alternatives. The minimum attractive rate of return is 15% per year. End of Year » Alternative 1 $2.500 750 1.200 06. At which of the following IRR values on incremental investment would alternative 1 be a beter 750 750 750 2.750 Alternative 2 $4,000 1.200 1200 1200 3.200 A. 12% B. 15% C.18% D.28% E, 2596 Decision criterion: 07 At which of the following IRR values on incremental investment would altermative 2 be a A, 5% B. 10% C. 1056 D.12% E, 18% Decision criterion: 08 A machine cost $50,000 on January 1,2010, and S100,000 on January 1,2015. The average inflation rate over the five years was 5% per year 2015? A.100% what is the true percentage increase in the cost of the machine from 2010 to B. 724% C. 63.9% D, 56.7% E. 9.4% Formula Used: 09-10. The four mutually exclasive altermatives bclow are being comparel ming the B- C ratio method Incremental B-C ratio when pared with Altemative Initial Investment B-C ratio Alternative (S millions) 20 25 35 45 1.00 0.95 1.22 0.89 0.40 1.00 214- 0.72 0.80 0.08 Which alternative, if any, should be selected? A. Alt. J 09. B. Alt. K C. Alt. L E. None Decision criterion: If it is estimated that alternative J will produce annual benefits averaging $2.5 million, no market value at the end of the 25-year life of the project, what is the maximum al maintenance cost for alternative J. to justify the project at an MARR of 10% per year? Assume modified BC ratio analysis. 10. B. $196,000 C. $256,000 D $296,000 E. $400,000 A. $100,000 Formula Used: ENgT 331 Test3 page 2Explanation / 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%
Pairs of alternative in sequence of their incremental investment will be:
JL, LM, Alternative K is prima facie rejected since its benefit cost ratio is less than one.
IN JL, L is preferred since incremental by ratio of JL is 1 but its B/C ratio is more than 1.
In LM, alternative M is preferred since its incremental ratio is one.
So the Ans is D Alt M
10 Ans is B $296,000
Explanation: PV factor for 25 yrs at 10% = 9.0770
B/C ratio = 1, i.e. benefits equal cost.
Benefits = 20000000,
Net annual savings = 20M/9.0770 = 2203361.44
Annual cost = annual savings-net annual savings
= 2500000-2203361.44 = 296638.56 rounded to 296000
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