Name: Nipesh Lamsal (074BME622)

4th Edition – Assignment 7 ( Engineering Economics)

Q.7.6

Net Cash Flow

n project A Project B Project C Project D
0 ($18,000) ($30,000) $34,578 ($56,500)
1 30000 32,000 -18000 2500
2 20,000 32,000 -18000 6,459
3 10,000 -22,000 -18000 -78,345
IRR 127% 45% 26% No IRR
Type simple non-simple simple non-simple

Q.7.8

Project cash flow

n A B C D E
0 ($100) ($100) ($200) ($50) ($50)
1 60 70 20 120 -100
2 150 70 10 40 -50
3 40 5 40 0
4 40 -180 -20 150
5 60 40 150
6 50 30 100
7 400 100
Type simple simple non-simple non-simple simple
IRR 56% 48% 8% 179% 24%

(b)

To find i*, we can compute , NFW = 0

Or, 150+60(1+i*) -100(1+i*)2 =0

Or, 100i*2 +140i* -110 =0

Solving , we get:

0.56 ,-1.96

Since, -196% can’t be IRR, So, the IRR is 56%.

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IRR NPW
0% $110.00
5% $93.20
10% $78.51
15% $65.60 NPWvs. i*
20% $54.17 $120.00
25% $44.00
$100.00
30% $34.91
40% $19.39 $80.00
45% $12.72 $60.00
50% $6.67
NPW

$40.00
55% $1.14 Series1
60% ($3.91) $20.00
65% ($8.54) $0.00
70% ($12.80) 0% 20% 40% 60% 80% 100% 120%
($20.00)
80% ($20.37)
($40.00)
100% ($32.50) i*
200% ($63.33)

Form the graph , we can see that the NPW is zero at about 56% of i*.

Similarly,graphs can be plotted to find rates for other projects.

Q.7.11

Net Cash Flow

n project A Project B
0 ($25,000) ($25,000)
1 2,000 10,000
2 6,000 10,000
3 12,000 10,000
4 24,000 10,000
5 28,000 5,000
IRR 32% 26%

i NPW-A NPW-B
0% $47,000 $20,000
10% $24,571 $9,803
20% $10,604 $2,897
30% $1,495 ($1,991)
40% ($4,683) ($5,578)
50% ($9,016) ($8,292)

Blue-A Red-B
$50,000

$40,000

$30,000

$20,000
NPW

Series1
$10,000 Series2

$0
0% 10% 20% 30% 40% 50% 60%
($10,000)

($20,000)
i

From graph, we can see that the NPW is equivalent at 45% .

Q.7.20

Net cash Flow

n A B C D E
0 ($1,000) ($5,000) ($2,000) ($2,000) ($1,000)
1 3,100 20,000 1560 2800 3,600
2 -2,200 12000 944 -200 -5,700
3 -3000 3,600
TYPE Mixed Mixed Pure Mixed Mixed
IRR 10.00% 350.34% 18.00% 32.45% 35.39%
Acceptability No yes yes yes yes

To find i*, we can compute , NFW = 0

For project A,

-1000+3100(1+i)-2200(1+i)2 = 0

Solving we get,

Or, i = 10%,100%

Or project B,

-3000+12000(1+i)+20000(1+i)2 -5000(1+i)3 = 0

Solving we get, i = 350.33%

Q.7.27

Given , IRR = 10%, so NPW(10%) = 0,

So, -2000+ 800(P/F,10%,1) +900(P/F,10%,2) + X(P/F,10%,3) = 0

Or, X = $704

Since, IRR > MARR(8%), so, the project is acceptable.

Q.7.29

Item NPW
Installation cost 25000 -25,000
salvage 5000 $2,822.37
operating cost /year -3000 ($13,065.78)
Revenue/ year ? X
for a 10% rate of return, NPW of all the cash flows
should be zero.
X= $35,243.41
Annual revenue = $9,111.85*(A/P,10%,6)
$8,092.15

Q.7.37

A B A-B
0 ($18,000) ($15,624) ($2,376)
1 0 0 $0
2 0 0 $0
3 0 0 $0
4 $9,000 $6,500 $2,500
IRR= 1.280%
So, for MARR < 1.28%, Model A is preferabble.

Q.7.39

For project A and B,as it has unequal project lives , we take the LCM of their lives .i.e. 6 years.

Net Cash Flow

n project A Project B B-A
0 ($100) ($200) ($100)
1 60 120 $60
2 50 -50 ($100)
3 -50 120 $170
4 60 -50 ($110)
5 50 120 $70
6 50 150 $100
IRR= 15.983%

Since, IRRB-A =15.983%>15%,

So accept project B.

For projects Cand D;

Net Cash Flow

n project C Project D C-D
0 ($4,000) ($2,000) ($2,000)
1 2410 1400 $1,010
2 2930 1720 $1,210
IRR = 7.03%

Since, IRRC-D = 7.03%<15%,

So accept project D.

For projects E and F;

Net Cash Flow

n project E Project F F-E
0 ($2,000) ($3,000) ($1,000)
1 3700 2500 ($1,200)
2 1640 1500 ($140)
IRR = No IRR

Since there is no IRR, that is project E is more preferable than project F.

Q.7.41 (a)

Net Cash Flow

n project A Project B B-A
0 ($1,000) ($1,000) $0
1 900 600 ($300)
2 500 500 $0
3 100 500 $400
4 50 100 $50
IRR= 21%
Since, IRR = 21% > 12% , so accept project
B.
Net Cash Flow
n project C Project B C-B
0 ($2,000) ($1,000) ($1,000)
1 900 600 $300
2 900 500 $400
3 900 500 $400
4 900 100 $800
IRR= 26%
since, IRR = 21% > 12% , so accept project
C.

(b) & (c)

Net Cash Flow

n project D
0 $1,000
1 -300
2 -300
3 -300
4 -300
BRR = 8%

Since, BRR = 8% < MARR=20% , So , it is not acceptable.

(d)

Net Cash Flow

n project C Project E C-E
0 ($2,000) ($1,200) ($800)
1 900 400 $500
2 900 400 $500
3 900 400 $500
4 900 400 $500
IRR= 50%
since, IRR = 50% > 12% , so accept
project C.

Q.7.45

All projects are acceptable since IRR > MARR.

From the given table , we can conclude that project A3 is most preferable.

Q.7.49

For unequal project lives , LCM of each project lives should be taken . In this case it is 3 years.

Net Cash Flow

n project A1 Project A2 A2-A1
0 ($10,000) ($15,000) ($5,000)
1 5,000 5000 $0
2 5,000 5000 $0
3 5,000 20000 $15,000

IRR= 44.225%
The MARR must be less than 44.225% for
Project A1 to be preferred.