Engineering Economic Analysis 12th Edition, Problem 9-83: Requires Excel table a
ID: 1159612 • Letter: E
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Engineering Economic Analysis 12th Edition, Problem 9-83: Requires Excel table and sensitivity graph. Thanks!
9-83 Assume a cost improvement project has only a first cost of $100,000 and a monthly net savings, M. There is no salvage value. Graph the project's IRR for payback periods from 6 months to the project's life of N years. The firm accepts projects with a 2- year payback period or a 20% IRR. When are these standards consistent and when are they not? (a) Assume that N 3 years. (b) Assume that N 5 years. (c) Assume that N 10 years. (d) What recommendation do you have for the firm about its project acceptance criteria?Explanation / Answer
Cost: $100,000
Acceptance criteria: 2 year payback period or 20% IRR
a) If yearly savings is 50,000 then the 2 year payback period criteria is met and the IRR is 23%
b) 5 year - yearly savings of $33,500 will give IRR of 20% , however it will not meet the payback period criteria
c) 10 year - yearly savings of $23,500 will give IRR of 20% , however it will not meet the payback period criteria
d) It should look at the payaback period as the NPV reduces as the time period increases.
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