Your department is in preliminary planning stages for a project that will cost $

Question

Your department is in preliminary planning stages for a project that will cost $451,000 late next year and is anticipated to return annual benefits of $75,000 for 10 years after that. Unfortunately, volatility in DC and the market is making it difficult to accurately forecast what the cost of capital will be for it. Your firm’s MARR=8% now and you can easily recommend approving this project based on this MARR, but your boss doesn’t want to proceed without a sensitivity analysis. At what potential MARR would your recommendation change?

a.      Approve below 8.5%, reject above

b.      Approve below 10.5%, reject above

c.      Approve below 12.5%, reject above

d.      Approve below 14.5%, reject above

Explanation / Answer

Solution:- b. Approve below 10.5%, reject above.

Explanation:-

Please Rate or comment if you have any doubt regarding this solution.

Particulars PV @ 8.5% PV @ 10.5% PV @ 12.5% PV @ 14.5% Cash outflow 451,000 451,000 451,000 451,000 Cash inflow:- Year 1 69,124.42 67,873.30 66,666.67 65,502.18 Year 2 63,709.15 61,423.80 59,259.26 57,207.15 Year 3 58,718.11 55,587.15 52,674.90 49,962.57 Year 4 54,118.07 50,305.12 46,822.13 43,635.44 Year 5 49,878.41 45,524.99 41,619.67 38,109.55 Year 6 45,970.88 41,199.09 36,995.26 33,283.45 Year 7 42,369.48 37,284.24 32,884.68 29,068.52 Year 8 39,050.21 33,741.40 29,230.83 25,387.35 Year 9 35,990.98 30,535.20 25,982.96 22,172.36 Year 10 33,171.41 27,633.66 23,095.96 19,364.50 NPV 41,101.10 107.96 (35,767.69) (67,306.93)

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