Fundamentals of Engineering Economics, 3rd ed.

2012

Chapter 7 SOLVED PROBLEMS

7.12) Consider an investment project with the following net cash flow: Year 0 1 2 3 Net Cash Flow -$1,500 X $650 X

What would be the value of X if the projects IRR is 10%? SOLUTION

PW(10%) $1,500 X ( P / F ,10%,1) $650( P / F ,10%, 2) X ( P / F ,10%,3) 0 1.6604 X $962.84 X $580

7.13) Consider an investment project with the following net cash flow:

Year 0 1 2 3 4

Net Cash Flow -$12,000 $2,500 $5,500 X X

What value of X if the projects IRR is 25%?

SOLUTION

PW(25%) $12,000 $2,500( P / F ,25%,1) $5,500( P / F ,25%,2) X ( P / A,25%,2)( P / F ,25%,2) 0 $6,480 0.9216 X X $7,031.25

Fundamentals of Engineering Economics, 3rd ed. 2012 7.20) Consider an investment project with the following net cash flow:

Year 0 1 2 3

Net Cash Flow -$3,000 $800 $900 X

Assume that the projects IRR is 10%. a) Find the value of X. b) Is this project acceptable at MARR = 8%?

SOLUTION (a) Since i* 10% and PW(10%) 0 , we have

PW(10%) $3,000 $800( P / F ,10%,1) $900( P / F ,10%,2) X ( P / F ,10%,3) 0 Solving for X yields

X $2,035 (b) Since IRR 8% , the project is acceptable.

7.23) You are considering a CNC machine. This machine will have an estimated service life of 10 years with a salvage value of 10% of the investment cost. Its expected savings from annual operating and maintenance costs are estimated to be $60,000. To expect a 15% rate of return on investment, what would be the maximum amount that you are willing to pay for the machine? SOLUTION

PW(15%) C $60, 000( P / A,15%,10) 0.1C ( P / F ,15%,10) 0 0.97528C $301,128 C $308, 760.56

Fundamentals of Engineering Economics, 3rd ed. 2012

7.35)

Consider the following two mutually exclusive alternatives:

n 0 1 2 3

Project A1 -$10,000 $5,000 $5,000 $5,000

Project A2 -$12,000 $6,100 $6,100 $6,100

a) Determine the IRR on the incremental investment in the amount of $2,000. b) If the firms MARR is 10%, which alternative is the better choice?

SOLUTION (a) IRR on the incremental investment: Net Cash Flow Project A1 Project A2 -$10,000 -$12,000 $5,000 $6,100 $5,000 $6,100 $5,000 $6,100
i* A2 A1 29.92%

n 0 1 2 3

A2 A1 -$2,000 $1,100 $1,100 $1,100

(b) Since it is an incremental simple investment, IRR A2-A1 29.92% 10% . Therefore, select project A2.

7.36) Consider the following two mutually exclusive alternatives:

n 0 1 2 3

A1 -$16,000 $7,500 $7,500 $7,500

A2 -$20,000 $5,000 $15,000 $8,000

a) Determine the IRR on the incremental investment in the amount of $4,000. (Assume that MARR is 10%) b) If the firms MARR is 10%, which alternative is the better choice?

Fundamentals of Engineering Economics, 3rd ed. 2012 SOLUTION (a) A2 A1 -$4,000 -$2,500 $7,500 $500

n 0 1 2 3

A1 -$16,000 $7,500 $7,500 $7,500

A2 -$20,000 $5,000 $15,000 $8,000

IRR A2 A1 13.08%

(b) Select Project A2.

7.37) Consider the following two mutually exclusive alternatives: n 0 1 2 3 Project A -$10,000 $5,500 $5,500 $5,500 Project B -$20,000 0 0 $40,000

The firms MARR is known to be 15%. (a) Compute the IRR of project B (b) Compute the PW of project A (c) Suppose that projects A and B are mutually exclusive. Using the IRR, Which project would you select? SOLUTION a) IRR B 25.99% b) PW(15%) A $10,000 $5,500( P / A,15%,3) $2,558 c) Incremental analysis: Net Cash Flow Project A Project B -$10,000 -$20,000 $5,500 0 $5,500 0 $5,500 $40,000 BA -$10,000 -$5,500 -$5,500 $34,500

n 0 1 2 3

Since IRR B A 24.24% 15%, select project B. 4