In: Economics
Part A:
Draw a before tax cash flow diagram of the ten-year plan
Part B:
If at the end of year 6, the investment is sold for $1000, calculate the PW, FW, and AW for the before tax cash flow MARR of 12%. Is the investment worth it? And why ?
Part C:
If the investment was used for ten years with no market value, what are the simple payback and the discounted payback periods.
Part D:
What is the IRR if it used for the ten years with no market value? Is it a good investment in this way? If so why?
PART A
PART B
PW = -5000 + 1100(P/A,i,n) - 200(P/A,i,n) +1000(P/F,i,n)
PW = -5000 + 1100(P/A,12,6) - 200(P/A,12,6) +1000(P/F,12,6)
Using DCIF Tables
PW = -5000 + 1100(4.1114) - 200(4.1114) +1000(0.5066)
PW = -$793.14
---------------------------------------------------------------------------------------------------------------------
FW = -5000(F/P,i,n) + 1100(F/A,i,n) - 200(F/A,i,n) + 1000
FW = -5000(F/P,12,6) + 1100(F/A,12,6) - 200(F/A,12,6) + 1000
Using DCIF Tables
FW = -5000(1.9738) + 1100(8.1152) - 200(8.1152) + 1000
FW = -$1565.32
---------------------------------------------------------------------------------------------------------------------
AW = -5000(A/P,i,n) + 1100 - 200 +1000(A/F,i,n)
AW = -5000(A/P,12,6) + 1100 - 200 +1000(A/F,12,6)
Using DCIF Tables
AW = -5000(0.2432) + 1100 - 200 +1000(0.1232)
AW = -$192.8.
PART C
Pay back period = 5000/(1100-200) = 5.55 years
PART D
Present worth of benefits = Present worth of cost
1100(P/A,i,n) = 200(P/A,i,n) + 5000
1100(P/A,i,10) = 200(P/A,i,10) + 5000
(P/A,i,10) = [(1+i)^n - 1]/[i(1+i)^n] = [(1+i)^10 - 1]/[i(1+i)^10]
Using trial and error method
i = 12.41% = 12%