Please show hand Calculation, NO SPREAD SHEET please. A & G Financial Inc. is in

Question

Please show hand Calculation, NO SPREAD SHEET please.

A & G Financial Inc. is investigating possible investment opportunities for the coming period. Two independent projects of an equal life of 10 years are available; Project A and Project B, and their information are given below. MARR (Minimum Acceptable Rate of Return) for A & G Financial Inc. is 10%. Which projects) should A & G invest in using Rate of Return analysis? What is A & G's MARR that makes the two projects equivalent? What projects) should A & G invest in using Future Worth analysis? Suppose the MARR is 4% and A & G must only choose one project, which one should it be? (you can answer this part without more calculations based on your answers to the first three parts)

Explanation / Answer

a. For rate of return analysis, i will use the Internal rate of return (IRR). It is the rate that makes NPV as nil.

Let project A's IRR be "a". PV = cash flow/(1+a)^n. Net annual revenue = 75,000-21,000 = 54,000

So, -300,000+54,000/(1+a)^1+54,000/(1+a)^2......54,000/(1+a)^10+45,000/(1+a)^10 = 0

Solving using a trial and error method, we get a = 13.495%

Let project B's IRR be "b". Net annual revenue = 155,000-61,000 = $94,000

So, -620,000+94,000/(1+b)^1+94,000/(1+b)^2....+94,000/(1+b)^10+90,000/(1+b)^10 = 0

Solving using a trial and error method, we get b = 9.73%

As rate of return is higher for Project A, it should be invested in.

b. Now the current MARR = 10%. Any project having rate lower than this will be rejected. Thus B will be rejected as its IRR<MARR.

Now if MARR = 9.73%, then its IRR = MARR. As per this criteria, both projects are either equal or above the MARR and hence equivalent.

c. Future worth = sum of all future values. Future value = cash flow amount * (1+marr)^10-n

FW of A: -300,000*1.10^(10-0)+54,000*1.10^(10-1)........54,000*1.10^(10-10)+45,000*1.1^(10-10)

= 127,498.19

FW of B: -620,000*1.1^(10-0)+94,000*1.1^(10-1)......94,000*1.1^(10-10)+90,000*1.1^(10-10)

= -20,002.41

d. Project A should be selected as it's IRR is higher than B and also its Future worth is higher than B.

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