P4 The following cash fow estimates have been developed for two small, mutually
ID: 1111899 • Letter: P
Question
P4 The following cash fow estimates have been developed for two small, mutually exclusive investment The minimum attractive rate of return is 15% per year. End of Year Alternative $2,500 750 750 750 150 2,750 Alternative 2 $4,000 1,200 0200 3,200 1,200 06. At which of the following IRR values on incremental investment would alternative 1 be a A. 1296 B.15% C.18% D. 28% E. 2596 Decision criterion: At which of the following IRR values on incremental investment would alternative 2 be a better choice? A.5% 07. B.10% C.10% D. 12% E.18% Decision criterion: A machine cost $50,000 on January 1,2010, and $100,000 on January 1,2015. The average inflation rate over the five years was 5% per year. What is the true percentage increase in the cost of the machine from 2010 to 2015? A. 100% 08. B. 72.4% C. 63.9% D. 56.7% E. 9.4% Formula Used: dssmatinas balau are being compared usine the B-C ratio method.Explanation / Answer
The incremental cash flows for 2 - 1 have a present value = -1500 + 450(P/A, i%, 5)
Hence for Question 6, correct values are 12% because then IRR is smaller than MARR. Hence option A is correct
For question 7, Option E is correct because IRR is greater than MARR.
For question 8, Option D is correct
Market rate of interest is 100000 = 50000*(1+i%)^5 which gives i = 14.86 per year. Inflation rate is 5% so inflation free rate of interest is 9.39%. Now for five years, this rate of interest becomes (1+9.39%)^5 - 1 = 56.63%
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