Question

A Wimax wireless network integrated with a satellite network can provide connectivity to any location within 10 km of the base station. The number of sectors per base station can be varied to increase the bandwidth. An independent cable operator is considering three bandwidth alternatives 44(Mbps), 55(Mbps), and 88 (Mbps). Assume a life of 20 years and a MARR of 10% per year.

Bandwidth Mbps	First Cost, 1000$	Operating Cost, 1000$ per Year	Annual Income, 1000$ per Year
44	-40,000	-2000	+5000
55	-46,000	-1000	+5000
88	-61,000	-500	+8000

1) Use incremental RoR analysis(IRR) and PW to determine the financially justified one.

2) Why should you use incremental Rate of return and what is the difference between that and MARR?

Answer 1

Answer:

All amounts are in 1000$ per year.

1)

Incremental ROR Analysis

Year	Incremental cash flows b/w 44 & 55	Incremental cash flows b/w 44 & 88	Incremental cash flows b/w 55 & 88
0	-6000	-21000	-15000
1	1000	4500	3500
2	1000	4500	3500
3	1000	4500	3500
4	1000	4500	3500
5	1000	4500	3500
6	1000	4500	3500
7	1000	4500	3500
8	1000	4500	3500
9	1000	4500	3500
10	1000	4500	3500
11	1000	4500	3500
12	1000	4500	3500
13	1000	4500	3500
14	1000	4500	3500
15	1000	4500	3500
16	1000	4500	3500
17	1000	4500	3500
18	1000	4500	3500
19	1000	4500	3500
20	1000	4500	3500
IRR	16%	21%	23%

IRR of Project with 88 Mbps is greater in comparison to other 2 projects. So, this project will be accepted.

PW Analysis:

Annual Cash inflow from 44 Mbps project=$3000($5000-$2000).

Present Value of annuity of $3000 at 10% MARR and 20 years period=$25540.69.

Present Worth of project=$25540.69-$40000=-14459.31(-ve)

Annual Cash inflow from 55 Mbps project=$4000($5000-$1000).

Present Value of annuity of $4000 at 10% MARR and 20 years period=$34054.25.

Present Worth of project=$34054.25-$46000=$11945.75(-ve)

Annual Cash inflow from 88 Mbps project=$7500($8000-$500).

Present Value of annuity of $7500 at 10% MARR and 20 years period=$63851.73.

Present Worth of project=$63851.73-$61000=$2851.73(+ve)

Present worth of 88 Mbps project is +ve. So only this project can be accepted.

2)

Incremental ROR gives the values that how much extra returns can be obtained by investing in a high investment project and what is the additional return for additional investment and additional risk.

MARR do not compare the projects and also it does not give the value of additional returns for additional investment and additional risk.