Question

economic. asap

Page 4 of 6 Problem 4 A capital investment of $25,000 is made in a project that will produce uniform annual revenues of $5,000 for 10 years, and then the project terminates. If the minimum attractive rate (MARR) is 10%. 1) Draw a cash flow diagram 2) What is the present worth of this project? 3) Find the internal rate of return (IRR) if a) Salvage value is zero. b) Salvage value is $8.000. 4) If the external reinvestment rate (ε) is 1 2% per annum compounded annually, find the external rate of return (ERR ) if: a) Salvage value is zero. b) Salvage value is $8,000, and there were extra expenses of $2000.00 and $1000 at the beginning of the third year and at the end of the fifth year, respectively

Answer 1

1 Cash Flow Diagram: $5,000 5,000 5,000 $5,000 $5,000 $5,000$5,000 $5,000 5,000 $5,000 000 $5,000 $25,000 Year-0 Year 1 Year -2 Year 3 Year 4 Year -5 Year 6 Year -7 Year -8Year- 9 Year 10 3 Year-4 2) Year-1 Year-2Ye Year 5 Year 6 Year-7Year 8Year -9 Year 10 Future cash flows (1) (2) $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 PVFactor @ 10% 0.909091 0.826446 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 0.424098 0.385543 [Ref: NOTE $4,545.45 $4,132.23 $3,756.57 $3,415.07 $3,104.61 $2,822.37 $2,565.79 $2,332.54 $2,120.49 $1,927.72 Present Value (1) x (2) Present worth of future CFs $30,722.84 [Sum of present value of total cash flows of year-1 thru year-10] $25,000.00 Less: Initial investment Net Present Worth (NPW) S5,722.84 IS30722.84 $25000] NOTE: PV Factor @ 10%-1/(1+10%) 1:1/(1+10%), 1/(1+10%); and so on 1/(1+10%)9:1/(1+10%) 10

3) a) without salvage value Year-1 Year 2 25,000 $5,000 $5,000 $5,000 Year- 0 Year-3 Year-4 Year-5 Year 6 Year-7 Year- 8 Year-9 Year-10 5,000 $5,000 $5,000 $5,000 $5,000 $5,000 Future cash flows Internal Rate of Return (IRR) 15.10% [Calculated using EXCEL FUNCTION IRR(). Ref: EXCEL SCREENSHOT] b) With salvage value Year 0 Year 1 Year-2Year-3 Year 4 Year 5 Year 6 Year-7 Year-8 Year -9 Year-10 $25,000 $5,000 $5,000 $5,000 5,000 5,000 $5,000 $5,000 $5,000 $5,000 13,000 Future cash flows Internal Rate of Return (IRR 16.96% [Calculated using EXCEL FUNCTION IR, Ref: EXCEL SCREENSHOT] EXCEL SCREENSHOT: 1 a) With Iva Year-0 Year 2 Year 3 Year 4 Year-5 Year 6 Year -7Year 8 Year 9 Year 10 2 Future cash flows $25,000 $5,000 $5,000$5,000 $5,000$5,000 $5,000 $5,000 $5,000 $5,000 $5,000 al Rate of Return (IRR) RR(82:12) 6 bWith salvage value 7 Future cash flows Year-O Year 1 $5,000 Year-2 Year 3 Year-4 Year-5 Year-6 Year-7 Year- Year-9 Year 10 $25,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 K7+8000 9 Internal Rate of Return (IRR) IRR(B7:L7

4) a) Without salvage value Year-0 Year -1 Year -2 Year 3 Year -4 Year-5 Year-6 Year-7Year-8 Year-9 Year 10 Future cash flows $25,000 $5,000 $5,000 5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 External Rate of Return (ERR) 13.38% [Calculated using EXCEL FUNCTION MIRRO at finance rate = 10% (MARR) & reinvestment rate is 12%. (Ref: EXCEL SCREENSHOT] b) With salvage value Year- 0 Year-1 Year-2Year- 3 Year-4 Year-5 Year -6Year-7 Year-8Year-9 Year 10 Future cash flows $25,000 $5,000 $3,000 5,000 $5,000 $4,000$5,000 $5,000 $5,000 $5,000 $13,000 External Rate of Return (ERR) 13.54% [Calculated using EXCEL FUNCTION MIRRO at finance rate = 10% (MARR) & reinvestment rate is 12%. (Ref: EXCEL SCREENSHOT] CEL SCREENSHOT 1 a without salvage value Year- 0 Year1 Year- 2 Year 3 Year 4 Year 5Year-6 Year-7 Year-8 Year-9 Year-10 2 Future cash flows $5,000 5,000$5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 4 Internal Rate of Return (ERR) -MIRR(B212, 10%,12%) 6 b with salvage value Year-0 Year- 2 Year-3 Year -4Year- 5 Year 6 Year -7 Year-8 Year-9 Year 10 $5,000 =D2-2000 $5,000 S5,000-62-1000 $5,000 SS,000 $5,000 $5,000 7 Future cash flows $25,000 =L2+8000 9 . Internal Rate of Return (ERR) -MIRR(B 7:L 7,10%,12%) NOTE: As additional expense of $2,000 would be incurred at the beginning of year-3, it is considered as occuring at the end of year-2.