Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

For Questions 4 and 5, round your answers to 2 decimal places. Note that full marks will be awarded only if ALL calculation steps are

For Questions 4 and 5, round your answers to 2 decimal places.

Note that full marks will be awarded only if ALL calculation steps are shown clearly.

Question 5 (20 marks)

  1. Two mutually exclusive alternatives are being evaluated, and their revenues and expenses are itemized in the table below. Suppose the MARR is 8% per year and the analysis period is 3 years, fill in the missing values of capital recovery and annual worth in the table for each alternative. Which alternative should be selected? [Include your answer of capital recovery in the calculation of the annual worth of each alternative. Show the annual worth equation which includes CR as one of its components.] (7 marks)

    Alternatives

    A

    B

    Capital investment (I)

    $28,000

    $55,000

    Annual revenues (R)

    $15,000

    $13,000

    Annual expenses (E)

    $23,000

    $28,000

    Salvage value (S)

    $6,000

    $8,000

    Useful Life

    3 years

    3 years

    Capital recovery (CR)

    Annual worth (AW)

CR of Alternative A:

AW of Alternative A:

CR of Alternative B:

AW of Alternative B:

Alternative____should be selected.

b. The following tables provide information of five mutually exclusive projects and their IRRs derived from the same service lives of 20 years. Using the method learned in Topic 8, explain the procedure to conduct the incremental investment analysis by filling in the given tables with the relevant information provided below. Which alternative should be chosen if MARR = 10% per year? (13 marks)

image text in transcribed

  1. Use only the relevant information given in the above tables to conduct the 3-step incremental investment analysis (by filling in the blanks below and in the tables).

Step 1: Include only the alternatives that satisfy the criterion of ____>=____

Fill in the last row of the first table to indicate whether the investment projects are economically justified or not.

Step 2: Arrange the alternatives in ____ order of their ____________________________ . .

Project ________is the base alternative.

Fill in the blanks in the table below. You may not need to fill in all columns.

MARR = 10%

Project

Capital investment (millions)

Annual revenues less expenses (millions)

System life (years)

IRR on total cash flow

Step 3: Given that the__________alternative is acceptable, we conduct the incremental analysis to decide whether moving on to______________________________alternative is economically justified.

Conduct the incremental analysis in the table below. You may not need to fill in all columns.

image text in transcribed

Based on the above incremental investment analysis, Alternative____ should be chosen.

A- D- E $4,000 $2,000 $6,000 $1,000 $9,000 $640 $4002 $7604 $1204 $7804 Capital investment (millions) Annual revenues less expenses (millions) System life (years) IRR on total cash flow Justified or not? (insert or "X" 20 20 20 20 20 15% 19% 11% 10% 6% A(A-B) A(B-D) A(C-B) (C-A) (A-D2 A(E-A) Increment considered IRRA 10% 28% 6% 2% 17% -5% [], [, 1 Base alternative and increment considered 18 2 3 4 5 6 72 8 98 10 11 12 13 14 15 16 172 18 19 20 IRR Justified or not? (insert */" or "x") T', 'T' 1 E | A- D- E $4,000 $2,000 $6,000 $1,000 $9,000 $640 $4002 $7604 $1204 $7804 Capital investment (millions) Annual revenues less expenses (millions) System life (years) IRR on total cash flow Justified or not? (insert or "X" 20 20 20 20 20 15% 19% 11% 10% 6% A(A-B) A(B-D) A(C-B) (C-A) (A-D2 A(E-A) Increment considered IRRA 10% 28% 6% 2% 17% -5% [], [, 1 Base alternative and increment considered 18 2 3 4 5 6 72 8 98 10 11 12 13 14 15 16 172 18 19 20 IRR Justified or not? (insert */" or "x") T', 'T' 1 E |

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Environmental Health And Safety Audits

Authors: Lawrence B. Cahill, Raymond W. Kane

9th Edition

1605907081, 9781605907086

More Books

Students also viewed these Accounting questions