6-18. A solar energy research center requires special- ized research equipment.

Question

6-18. A solar energy research center requires special- ized research equipment. For this purpose, four pieces of equipment and their associated cash flows (listed below) are under consideration. One piece of equip- ment must be selected and the laboratory's MARR is 10% per year. (64) Equipment EOY 2 4 -$150,000-$80,000-$125,000-$100,000 1-3 -$20,000 -$30,000 -$25,000 -$40,000 4 $30,000 -$30,000$25,000-$45,000 5 -$40,000 -$35,000 $30,000-$50,000 a. Use the PW method to rank-order the economic attractiveness of the four pieces of equipment. b. Determine the interest rate at which the laboratory would be indifferent between Equipments 2 and 3.

Explanation / Answer

a calculation of the present value method 1 1 years 1 2 3 4 5 2 cash flows 20000 20000 20000 30000 40000 3 PVRF at 10 % 0.9091 0.8264 0.7513 0.6830 0.6209 4 present value cash flows ( 2*3) 18182 16529 15026 20490 24837 5 total present value cash flows 95064 6 cash flow at year 0 150000 7 total present value cash flows ( 5 + 6 ) 245064 2 1 years 1 2 3 4 5 2 cash flows 30000 30000 30000 30000 35000 3 PVRF at 10 % 0.9091 0.8264 0.7513 0.6830 0.6209 4 present value cash flows ( 2*3) 27273 24793 22539 20490 21732 5 total present value cash flows 116828 6 cash flow at year 0 80000 7 total present value cash flows ( 5 + 6 ) 196828 3 1 years 1 2 3 4 5 2 cash flows 25000 25000 25000 25000 30000 3 PVRF at 10 % 0.9091 0.8264 0.7513 0.6830 0.6209 4 present value cash flows ( 2*3) 22727 20661 18783 17075 18628 5 total present value cash flows 97874 6 cash flow at year 0 125000 7 total present value cash flows ( 5 + 6 ) 222874 1 years 1 2 3 4 5 2 cash flows 40000 40000 40000 45000 50000 3 PVRF at 10 % 0.9091 0.8264 0.7513 0.6830 0.6209 4 present value cash flows ( 2*3) 36364 33058 30053 30736 31046 5 total present value cash flows 161256 6 cash flow at year 0 100000 7 total present value cash flows ( 5 + 6 ) 261256 projects 1 2 3 4 present worths 245064 196828 222874 261256 ranking based on the lowers present worth 3 1 2 4 b calculation of the rate of return at which the equipment 2 and 3 are indifferent 1 years 0 1 2 3 4 5 2 cash flows of project 2 -80000 30000 30000 30000 30000 35000 cash flows of project 3 -125000 25000 25000 25000 25000 30000 3 incremental cash flows ( 2 - 3 ) -45000 5000 5000 5000 5000 5000 internal rate of return using excel .=irr(cash flows from year 0 to 6 ) -16.86%

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