Question

1 Question(3): The IPS company has installed a system to help reduce the number of defective products. The capital investment in the system is $X1, and the projected annual savings are tabled below. The system's market value at the EOY five is negligible, and the MARR is $2% per year. EOY Savings 25,000 2 30,000 35,000 40,000 5 46,000 a. What is the FW of this investment Based on economical decision rule, is this a good investment? b. What is the IRR of the system Based on economical decision rule, is this a good investment? c. What is the discounted payback period for this investment? 3 4

draw the cash flow diagram if applicable,

x1=75000

x2=12%

Answer 1

a.

A B C D E 1 2 3 4 5 6 7 8 N EOY Cash flows Future value 0 - 75000 -132175.6262 1 25000 39337.984 30000 42147.84 3 35000 43904 4 40000 44800 5 46000 46000 9 10 FW 84014.19776 11 NPV 47671.912 12 13

А B С D 1 2 EOY Cash flows -75000 3 0 4 1 25000 2 30000 5 6 Future value =C3*(1.124($B$8-B3)) =C4*(1.12^($B$8-B4)) =C5*(1.12^($B$8-05)) =C6*(1.12^($B$8-B6)) =C7*(1.12^($B$8-B7)) =C8*(1.12^($B$8-B8)) 3 35000 7 4 40000 8 5 46000 9 10 FW =SUM(D3:08) 11 NPV |=C3+NPV(12%, C4:C8) 12

Here, both the future worth and NPV are positive. Hence, this is a good investment

b.

А B С D 1 2 3 4 5 EOY Cash flows 0 -75000 1 25000 30000 3 35000 4 40000 5 46000 N 6 7 8 9 10 IRR 32.66% IRR(C3:08) 11 12 13

The IRR of the cash flows is 32.66% which is well above the MARR of 12%. Hence, this is good investment

c.

The discounted payback is the time taken in years for the cumulative discounted cash flows to become 0

Here, we observe that the cumulative discounted cash flows become 0 after the year 3

D B С D E F 1 2. EOY Cash flows PV of cash flows -75000 3 0 - 75000 st 1 25000 22321.42857 5 2 30000 Cumulative discounted cash flows - 75000 -52678.57143 -28762.7551 -3850.446429 21570.27671 47671.91207 6 3 23915.81633 24912.30867 25420.72314 26101.63536 35000 7 4 40000 46000 8 5 9 Discounted payback period 3.15 10 11 12 12

A B D 1 2 3 EOY PV of cash flows Cumulative discounted cash flows 0 4 1 5 2 Cash flows - 75000 25000 30000 35000 40000 146000 =C3/(1.12^(B3)) =C4/(1.12^(B4)) =c5/(1.124(B5)) =C6/(1.12^(B6)) =C7/(1.12^(B7)) =C8/(1.124(B8)) =D3 =D4+E3 =D5+E4 =D6+E5 =D7+E6 =D8+E7 6 3 7 14 8 5 9 10 Discounted payback period =B6+E6/(E6-E7) 11

Hence, the discounted payback period for this investment = 3.15 years