Exam Solution

No. 1
AWD = -(50,000 + 200,000) (A/P,12%,3) + 40,000(A/F,12%,3)
= -250,000(0.41635) + 40,000(0.29635)
= $-92,234
AWC = -300,000(A/P,12%,10) + 50,000(A/F,12%,10)
= -300,000(0.17698) + 50,000(0.05698)
= $-50,245
Purchase the challenger and plan to keep then for 10 years, unless a better
challenger is evaluated in the future.

No. 2
a. 5 years
Cash flow increase/year
150
Year
Cash Flow
Accumulated cash flow
0
-5000
-5000
1
750
-4250
2
900
-3350
3
1050
-2300
4
1200
-1100
5
1350
250

b. Because i is unknown, it could either be left as a variable i or be assumed (e.g.,

10%). Full-point is given when students understand how to calculate (doesnt
necessarily provide numerical answer of years). The idea is to convert cash flow
to present worth and identify n (years), given i, when NPV is firstly greater than
zero (or whenever investment is paid off by revenues, positive cash flow)
Cash flow increase/year

Year

150

Cash Flow
Discounted cash flow
0
-5000
-5000
1
750 =750/(1+i)^1
2
900 =900/(1+i)^2
3
1050 =1050/(1+i)^3
4
1200 =1200/(1+i)^4
5
1350 =1350/(1+i)^5
6
1500 =1500/(1+i)^6
7
1650 =1650/(1+i)^7

Example
Discounted CF for i=
10%
-5000
681.8181818
743.8016529
788.8805409
819.6161464
838.2437861
846.7108951
846.7108951

Accumulated CF
-5000
-4318.181818
-3574.380165
-2785.499624
-1965.883478
-1127.639692
-280.9287967
565.7820984

No. 3
(a) All machines have ROR > MARR of 12% and all increments of investment have
ROR > MARR. Therefore, select machine 4.
(b) Machines 2, 3, and 4 have ROR greater than 20%. Increment between 2 and 3 is
justified, but not increment between 3 and 4. Therefore, select machine 3.