Question

Just the final answers please

Consider the two mutually exclusive investment projects given in the table below. Click the icon to view the cash flows for the projects. (a) To use the IRR criterion, what assumption must be made in comparing a set of mutually exclusive investments with unequal service lives? Select all that apply. A. Project A2 can be repeated at the same cost in the future. DB. The required service period is infinity. C. The required service period is 3 years. OD. Project A1 can be repeated at the same cost in the future, (b) With the assumption made part (a), determine the range of MARRs which will indicate that project A1 should be selected. Select the correct choice below and fill in the answer box to complete your choice. (Round to one decimal place.) More Info - X OA. MARR OB. MARR O c. MARR> % n 0 1 2 3 Net Cash Flow Project A1 Project A2 -$12,000 - $17.000 7,000 24,000 7,000 7,000

Answer 1

A. The options to be selected are A and C.

This is because as project A has life of 3 years and Project A2 of 1. If project A2 can be repeated again at the same cost and required service life is 3 years, then we can repeat project A2 and equate them.

B. The correct answer is if MARR>50.4%

The cashflow with project A2 repeated for 3 years can be written as

Year 0 1 2 Project A1 Project A2 -12000 -17000 7000 7000 7000 7000 7000 24000 3

Project A2 years 1 and 2 include the cost of new installation (which is -17000).

To find ranges where the NPV of project A1 will be higher can be found by the following (lets assume the interest rate is r)

7000 - 12000 + 1 + + 7000 7000 (1 + r)2 (1+r) + 7000 > -17000 + 1+r + 7000 24 000 (1+r)2 (1+r) 3 +

solving for r (preferably with an equation solver such as wolfram, matlab etc), we get r>=50.4%