Question

The following three projects are available but because of resource limitations, only one can be done. The Do Nothing option is also available and the company MARR is 15%. F0 F1 F2 F3 F4 F5 A -$10,000 $5,000 $2,000 $2,500 $3,000 $3,100 B -$7,000 $2,000 $2,500 $3,000 $2,000 $1,000 C -$6,000 $2,000 $2,000 $2,500 $2,750 $3,000 a) Which project should be selected using ROR incremental analysis? b) Which project should be selected using present worth incremental analysis?

Answer 1

a) ROR = average cash inflow / cash outflow

	Cash flows
Year	A	B	C
0	-$10,000	-$7,000	-$6,000
1	$5,000	$2,000	$2,000
2	$2,000	$2,500	$2,000
3	$2,500	$3,000	$2,500
4	$3,000	$2,000	$2,750
5	$3,100	$1,000	$3,000
ROR	31.20%	30.00%	40.83%

Project C should be chosen as it has the highest ROR.

b) Present worth = sum of present values of all cash flows

	Cash flows			Cost of capital	PV of cash flows
Year	A	B	C		A	B	C
0	-$10,000	-$7,000	-$6,000	$1	-$10,000	-$7,000	-$6,000
1	$5,000	$2,000	$2,000	$0.870	$4,347.83	$1,739.13	$1,739.13
2	$2,000	$2,500	$2,000	$0.756	$1,512.29	$1,890.36	$1,512.29
3	$2,500	$3,000	$2,500	$0.658	$1,643.79	$1,972.55	$1,643.79
4	$3,000	$2,000	$2,750	$0.572	$1,715.26	$1,143.51	$1,572.32
5	$3,100	$1,000	$3,000	$0.497	$1,541.25	$497.18	$1,491.53
				NPV	$760.41	$242.72	$1,959.06

On basis of present worth, project C should be chosen as it has the highest NPV.