Complete the following problems using an Excel spreadsheet. You must show your work to get full credit. Each student is responsible for completing their own response to the problems.
1. A plant engineer is considering two machines to purchase:
Item Model A Model B
Initial Cost $8,000 $9,000
Annual Savings $1,750 $2,000
Annual Maintenance $200 $350
Expected Life 8 years 8 years
Salvage Value $800 $900
The firm's MARR is 10%. On the basis of the IRR criterion, which machine is the better choice?
2. Assume that you are planning on purchasing a Tesla Model 3 for $35,000. You will be able to make a down payment of $5,000. The remaining $30,000 will be financed by the dealer. The dealer computes your monthly payment to be $775.00 for 48 months of financing. What is the dealer's annual rate of return on this car loan?
3. Consider the following projects with the following sequences of cash flows:
Period Net Cash Flow
n A B C D
0 $45,000 -$15,000 -$12,500 $10,000
1 -$15,000 -$15,000 $5,000 -$9,000
2 -$15,000 -$15,000 $5,000 -$11,500
3 -$20,000 $60,000 $3,000 $10,000
a) Which of the projects represent simple investments?
b) Which of the projects represent nonsimple investments?
c) Compute the i* for each project.
d) Which of the projects has no rate of return?
4. Consider the following project's cash flows:
n Net Cash Flow
0 -$20,000
1 $7,500
2 X
3 $10,000
Assume that the project's IRR is 15%.
a) Find the value of X.
b) Is the project acceptable at MARR = 12%?
5. Consider two investments with the following sequences of cash flows:
n Project A Project B
0 -$150,000 -$175,000
1 $45,000 $30,000
2 $55,000 $65,000
3 $75,000 $95,000
4 $80,000 $100,000
a) Computer the IRR for each investment.
b) At MARR = 15%, consider the acceptability of each project.
c) If A and B are mutually exclusive projects, which project would you select on the basis of the rate of return on incremental investment?