Q2. Three mutually exclusive investment project alternatives are available. Rele
ID: 2727871 • Letter: Q
Question
Q2. Three mutually exclusive investment project alternatives are available. Relevant information regarding the projects is given in the table below. The company’s MARR is 15%. Perform the following analyses to help choose the best alternative.
Investment Project Alternative
A
B
C
Useful Life (years)
6
8
12
Initial Investment
100,000 TL
155,000 TL
240,000 TL
Annual Revenues
45,000 TL
54,000 TL
66,000 TL
Annual Costs
8,000 TL
11,000 TL
14,000 TL
Salvage Value
45,000 TL
60,000 TL
180000 TL
a) Determine the IRR of each alternative using a suitable Excel function. Verify analytically (i.e. by writing the correct expression for the PW of each project using appropriate equivalence factor formulas) that the IRR you found is correct.
b) Calculate, using a suitable Excel function and also analytically, the ERR of each alternative and determine which ones are acceptable. Use an external funding/re-investment rate of e = 8%.
c) Assuming that the projects are repeatable, perform an AW analysis to determine the acceptable projects and the most profitable project. Find your result both analytically and by using suitable Excel functions. Compare your findings to those in Part (a).
d) Assuming that the projects are not repeatable, perform a PW analysis based on a 8-year study period to determine the acceptable projects and the most profitable project. Here, you will need to calculate the imputed market value for project C, and use this appropriately to calculate this project’s PW based on a 8-year co-terminated life. You are required to do your calculations analytically (but you can use certainly use Excel functions to verify them). Compare your results here with those in Parts (a) and (b).
e) Calculate the simple payback period for each project. Based on your results, would you modify (i.e., add any further information) to your conclusions in Parts (b) and (c).
f) Calculate the discounted payback period for each project. Based on your results, would you modify (or, add any further information) to your recommendation in Parts (b) and (c).
Investment Project Alternative
A
B
C
Useful Life (years)
6
8
12
Initial Investment
100,000 TL
155,000 TL
240,000 TL
Annual Revenues
45,000 TL
54,000 TL
66,000 TL
Annual Costs
8,000 TL
11,000 TL
14,000 TL
Salvage Value
45,000 TL
60,000 TL
180000 TL
Explanation / Answer
Investment Project Alternative A B C Useful Life (years) 6 8 12 Initial Investment -100,000 -155,000 -240,000 Annual Revenues 45,000 54,000 66,000 Annual Costs 8,000 11,000 14,000 Net savings 37,000 43,000 52,000 Salvage Value 45,000 60,000 180000 PVAF 3.78448 4.48732 5.42061 PV of savings 140025.76 192954.76 281871.72 PVIF 0.43232 0.3269 0.1869 PV of salvage value 19,454.40 19,614.00 33,642.00 Present worth 59,480.16 57,568.76 75,513.72 Investment Project Alternative A B C Useful Life (years) 6 8 12 Initial Investment -100,000 -155,000 -240,000 Annual Revenues 45,000 54,000 66,000 Annual Costs 8,000 11,000 14,000 Net savings 37,000 43,000 52,000 Salvage Value 45,000 60,000 180000 PVAF 2.48281 3.42122 4.27844 PV of savings 91863.97 147112.46 222478.88 PVIF 0.18067 0.1789 0.10152 PV of salvage value 8,130.15 10,734.00 18,273.60 Present worth -5.88 2,846.46 752.48 IRR 33% 24.50% 21%
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