Unfortunately, the Capital Investment Committee refused to approve your recommen

Question

Unfortunately, the Capital Investment Committee refused to approve your recommendation (Problem 1) since you did not consider the uncertainty inherent in these types of investments.You pull out your very dog-eared text from PMAN 635 and repeat your analysis, this time using Crystal Ball and the following information:

Investment A:

Year 0 Investment cost:Triangular distribution (optimistic:$100,000; most likely:$125,000; pessimistic:$200,000)

Year 1-5 operating cost:Normal distribution (mean of $10,000, standard deviation of $2,000)

Year 1 Benefits:Normal distribution (mean of $90,000, standard deviation of $20,000)

Year 2 Benefits:Normal distribution (mean of $55,000, standard deviation of $15,000)

Year 3 Benefits:Normal distribution (mean of $35,000, standard deviation of $10,000)

Year 4 Benefits:Normal distribution (mean of $20,000, standard deviation of $5000)

Year 5 Benefits:Normal distribution (mean of $20,000, standard deviation of $5000)

Investment B:

Year 0 Investment cost:Uniform distribution (Minimum:$65,000; Maximum: $75,000)

Year 1 Benefits:Normal distribution (mean of $45,000, standard deviation of $20,000)

Year 2 Benefits:Normal distribution (mean of $15,000, standard deviation of $5,000)

Year 3 Benefits:Normal distribution (mean of $10,000, standard deviation of $3,000)

Year 4 Benefits:Normal distribution (mean of $10,000, standard deviation of $3,000)

Year 5 Benefits:Normal distribution (mean of $15,000, standard deviation of $5,000)

If the IRR is still 6%, what is the NPV for each investment?

Explanation / Answer

Investment A Out flow $2,00,000 Optimistic $1,00,000 Most Likely $1,25,000 Pessimistic $2,00,000 Year 1-5 PVF@6% Cost Operating Cost $10,000 4.212 $42,120 Year Benefits PVF@6% Benefits 1 $90,000 0.943 $84,870 2 $55,000 0.890 $48,950 3 $35,000 0.840 $29,400 4 $20,000 0.792 $15,840 5 $20,000 0.747 $14,940 $1,94,000 Outflow $2,00,000 NPV -$6,000 Investment B Out flow $75,000 Minimum $65,000 Maximum $75,000 Year Benefits PVF@6% Benefits 1 $45,000 0.943 $42,435 2 $15,000 0.890 $13,350 3 $10,000 0.840 $8,400 4 $10,000 0.792 $7,920 5 $15,000 0.747 $11,205 $83,310 Outflow $75,000 NPV $8,310

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