You are faced with a decision on an investment proposal. Specifically, the estim

Question

You are faced with a decision on an investment proposal. Specifically, the estimated additional income 3) from the investment is $205,000 per vear: the initial investment costs are 00 and the estimated annual costs are $80,000, which begin decreasing by $5,000 per Assume a 9-year analysis period, no salvage value, year starting at the end of the second year and MARR = 15%. (a) Draw the cash flow diagram (b) What is the IRR (c) What is the simple payback period? (d) What is the discounted payback period? of this proposal? Is this proposal acceptable? Why or why not?

Explanation / Answer

Proposal is accepted

MARR < 15.82, Proposal accepted otherwise rejected.

0 1 2 3 4 5 6 7 8 9 Cost -650,000 -80,000 -75,000 -70,000 -65,000 -60,000 -55,000 -50,000 -45,000 -40,000 Benefit 205,000 205,000 205,000 205,000 205,000 205,000 205,000 205,000 205,000 CF -650,000 125,000 130,000 135,000 140,000 145,000 150,000 155,000 160,000 165,000 Accumulative CF -650,000 -525,000 -395,000 -260,000 -120,000 25,000 175,000 330,000 490,000 655,000 Payback Period 4.83 "= 4 + 120000/145000" DCF @ 15% -650,000 108,696 98,299 88,765 80,045 72,091 64,849 58,270 52,304 46,903 Accumulative DCF -650,000 -541,304 -443,006 -354,241 -274,196 -202,105 -137,256 -78,986 -26,681 20,222 Dis Payback Period 8.57 "= 8 + 26,681/46,903" IRR 15.82% Investment is acceptable as NPV at 15% is positive. Additionally, as given MARR is less than IRR, NPV will be positbe and acceptable but little fluctuation in MARR may go beyond IRR and it can be rejected. NPV @ 15% 20,222.06

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