Question

1. When evaluating multiple alternatives or projects, against what must they be compared, if they are (a) independent, and (b) mutually exclusive? (5 pts) 2. Define the term capitalized cost and give a real-world example of something that might be analyzed using a capitalized cost evaluation technique. (5 pts) 3. After you have conducted a future worth comparison of alternatives, what do you multiply the FW values by in order to obtain the AW values of the alternatives? (5 pts) 4. Assume an alternative has a 3-year life and that you calculated its AW value over its 3- year life cycle. If you were asked to provide the AW value of the alternative for a 4-year study period, is the AW value you calculated for the alternative's 3-year life cycle a valid estimate of the AW over the 4-year study period? Why or why not? (5 pts) 5. What is (a) the highest, and (b) lowest rate of return (in percent) possible? (5 pts) 6. Assume alternatives A and B are being evaluated by the rate of return method against a MARR of 15% per year. Alternative B requires a higher initial investment than A and the i* values are 1 = 20% and 1 = 16% per year. Under what circumstance is alternative B the preferred choice? (5 pts) 7. What is the primary purpose of a public sector project? (5 pts) 8. Identify the following projects as primarily public or private sector. (19 pts) (a) Bridge across Ohio River (b) Coal mine expansion (c) Baja 1000 race team (d) Consulting engineering firm (e) New county courthouse building (Flood control project (9) Endangered species designation (h) Freeway lighting (lumen increase) (i) Antarctic cruise for you and your spouse (1) Crop dusting airplane purchase

Answer 1

Ans 1

The prominently used Investment appraisal techniques for mutually exclusive and independent projects are Net Present Value(NPV) Method and Internal Rate of Return Method(IRR). In between them NPV method is considered better as reinvestment rate assumed (cost of capital) in this method is more realistic, and method works even if project has non normal cash flows.

In Net Present Value Method, the initial cash outlay (or sometimes, Total cash outflows at Present Value) for a project is compared against the Aggregated Present Value of later cash inflows from the project in coming years.

The Formula is NPV = Total Cash Outlflow (Initial outflow and Present Value of any later outflows) - Present Value of Cash Inflows (discounted at rate of cost of capital).

The NPV of all projects is determined separately and project with highest NPV is generally chosen.