Question

14. Consider four projects with the following sequences of cash flows: n 0 NET CASH FLOWS A B C -$25,000|-$23,000-$56,500 $12,000 $32,000 -$2,500 $23,000 $32,000-$6,459 $34,000 $25,000 $88,345 3 (a) Identify all the simple investments. (b) Identify all the non-simple investments. (c) Compute the Internal Rate of Return (IRR) for each project using NPV method and Excel. Note the following: A simple (or conventional) investment is simply when one sign change occurs in the net cash flow series. If the initial cash flows are negative, we also call them simple-investment. A non-simple investment is an investment in which more than one sign change occurs or use multiple interests in the cash flow series. The internal rate of return (IRR) is the interest rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. If IRR>MARR>0 accept the project. Internal rate of return (IRR) is another term for Rate of Return (ROR) 15. Two AEW relations are given below: AEW. = -23,000 A/P, 10%,10)+ 40001 A/F, 10%, 10)- 3000 - 3 x AEW2 = -8,000(A/P, 10%,4) - 2000 - 6x The value of the breakeven point x in miles per year is closest to: (A) 1130 (B) 1224 (C) 1590 (D) 655

Answer 1

A simple investment is defined as an investment in which the initial cash flows are negative and only one sign change in the net cash flow occurs, whereas a nonsimple investment is an investment for which more than one sign change in the cash flow series occurs. Hence,

Simple Investments	A
Non Simple Investments	B and C

The formula to calculate IRR is

IRR = ( Cash Flows / (1+r)i ) - Initial Investment

where r is Rate and i is the Period.

В -$25,000 $12,000 $23,000 $34,000 59.33% -$23,000 $32,000 $32,000 -$25,000 82.72% -$56,500 | -$2,500 -56,459 $88,345 11.38% IRR

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