You have the following investment options as laid out in the table below: Projec
ID: 340807 • Letter: Y
Question
You have the following investment options as laid out in the table below:
Project Cash Flow
Year
A
B
C
D
E
0
-$1000
-$1200
-$2000
-$1600
-$1400
1
900
800
950
900
400
2
500
700
950
900
400
3
100
700
950
900
1200
4
50
300
950
900
400
If your MARR is 15%, which of these options should you select? Solve this problem by challenger-defender analysis.
Project Cash Flow
Year
A
B
C
D
E
0
-$1000
-$1200
-$2000
-$1600
-$1400
1
900
800
950
900
400
2
500
700
950
900
400
3
100
700
950
900
1200
4
50
300
950
900
400
Explanation / Answer
In given question ........... Project - A with least intitial cost and low annual cashflow is the defender. Remaining all projects are compared with project - A as they are challengers trying to replace project - A
B to A : It means that challenger B compared to Defender A. Here the t = 0 cash flow = -200. This is additional cash out flow if B is taken. And annual cash inflow = B - A are savings due to selection of B
A comparision of above NPV values indicates that Project - D is the best alternative for investment.
Note
Cash flows of each year from t = 1 to t = 4 are calculated by deducting project - A cash flows. For example C to A
(950 - 900), (950 - 500), ( 950 - 100) and ( 950 - 50)
Year Discounting Factor at 15% B to A PV(B to A) C to A PV (C to A) D to A PV(D to A) E to A PV (E to A) 0 1 -200 -200 -1000 -1000 -600 -600 -400 -400 1 0.86956522 -100 -86.95652 50 43.478261 0 0 -500 -434.78261 2 0.75614367 200 151.22873 450 340.26465 400 302.45747 -100 -75.614367 3 0.65751623 600 394.50974 850 558.8888 800 526.01299 1100 723.26786 4 0.57175325 250 142.93831 900 514.57792 850 485.99026 350 200.11364 NPV = 401.72026 457.2096 714.46071 12.984516Related Questions
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