Question

7.16 Consider the following projects: Net Cash Flow A B C D 0 -$1,800 - $1,900 $2,200 $3,000 $500 $800 $5,600 $360 $100 $600 $4,900 $4,675 $100 $500 -$3,000 $2,288 $1,000 $700 -$7,000 -$1,400 $2,100 $900 (a) Classify cach project as either simple or nonsimple. (b) Identify all positive i*s for each project. (c) Plot the present worth as a function of interest rate (i) for each project.

Answer 1

a) Projects A, B and D are simple where the cash sign changes only once i.e cash outflow is once and then only cash inflows while project C is non-simple as the cash flow signs changes more than once i.e. we have multiple cash outflows and inflows.

Calculate the IRR for each project

For project A

Particulars	Amount
Cash outflow 0	-1800
Cash Flow 1	500
Cash Flow 2	100
Cash Flow 3	100
Cash Flow 4	1000
IRR	-2%

The present worth is: -100

For Project B

Particulars	Amount
Cash outflow 0	-1900
Cash Flow 1	800
Cash Flow 2	600
Cash Flow 3	500
Cash Flow 4	700
IRR	14%

The present worth is 700

For project C

Particulars	Amount
Cash outflow 0	-2200
Cash Flow 1	5600
Cash Flow 2	4900
Cash Flow 3	-3000
Cash Flow 4	-7000
Cash Flow 5	-1400
Cash Flow 6	2100
Cash Flow 7	900
IRR	1%

The present worth is -100

For Project D

Particulars	Amount
Cash outflow 0	-3000
Cash Flow 1	360
Cash Flow 2	4675
Cash Flow 3	2288
IRR	50%

The present worth is 4323

Present worth of Projects 5000 4323 4500 4000 3500 3000 2500 2000 1500 1000 500 Series1 700 -100 -100 0 Project A Project B Project C Project D -500