Question

Assume the following 2 projects and MARR, and that you can select only one of them.

NCF per year	0	1	2	3	4	5
Project X	-120,000	40,000	48,000	56,000	64,000	72,000
Project Z	-145,000	40,000	48,000	57,600	80,000	96,000
MARR	10%

Fully describe the concept of Net Cash Flow per year, and why there is a “year zero” in the timeline.

Describe the concept of Minimum Acceptable Rate of Return.

Describe the concept of Net Present Value.

Describe the concept of Net Future Value.

Describe the concept of Internal Rate of Return.

Describe the concept of Benefit-Cost Ratio.

Explain the concept of Absolute Value Methods and identify which of the above tools fit in this category.

Explain the concept of Relative Value Methods and identify which of the above tools fit in this category.

Select one of the above Absolute Value Methods, explain your preference, and then use it to identify the best project.

Select one of the above Relative Value Methods, explain your preference, and then use it to identify the best project.

Explain why the best project selection differs according to the method used.

Which project would you end up selecting, explain why, and identify the pros and cons of your decision.

Answer 1

Describe the concept of Minimum Acceptable Rate of Return:

It Indicates the minimum rate of return that a project manager considers acceptable before initiating a project.A project manager is more likely to start a new project if the MARR exceeds the current level of other projects.

Describe the concept of Net Present Value:

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.The present value of the annual cashflow is calculated by dicounting the annual cashflow.

Describe the concept of Net Future Value:

Net Future Value is a combination of different future values from different times, all who are put into one larger present value.The calculator is using a future value calculation for each different present value to bring the total amount to one date in the future.

Describe the concept of Internal Rate of Return:

Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Describe the concept of Benefit-Cost Ratio:

The Benefit-Cost ratio (BCR) establishes the relationship between the cost and benefits of a proposed project or proposal. It is an essential parameter to evaluate the value of money that would be expended on the project. It is calculated by the method of Profit from the project/initial investment in the project.

Absolute Value Methods:

An absolute value is a business valuation method that uses discounted cash flow (DCF) analysis to determine a company's financial worth. The absolute value method differs from the relative valuemodels that examine what a company is worth compared to its competitors.

Relative Value Methods :

In this method of determining an asset's value that takes into account the value of similar assets.Comparing these multiples across a company’s peer or competitor group to determine an over- or under-valued security.