associated with the problem. PW or AW as the performance measure. Requires extra

Question

associated with the problem. PW or AW as the performance measure. Requires extra effort alternatives, analysis if looking at two or more lihg the degrees of risk If two or more parameters are being varied best to apply If ROR is the performance measure: . More work! Example. wl Rice, Inc., expects to purchase a new asset 1o wtd rice handling. Most likely estimates are a first of $80,000, zero salvage value, and a cash hefore taxes (CFBT) per year t that follows the relation 27,000-20001. The MARR for the company varies from 10% to 25% per year for different types of investments. The economic life of similar machinery varies from 8 to auton flow

Explanation / Answer

Ans- (A)

we have to follow the procedure to understand the sensitivity of PW to MARR variation.

assumptions-

1 MARR is the parameter of interest.

2 select 5% increment to evaluate sensitivity to MARR. the range is given10% to 25%

3 the measure of worth is PW

4 set up the PW relation for 10 years when MARR is 10%

explanation-

PW= -80000+25000(P/A,10%,10)-2000(P/G,10%,10)

=27830

the PW for all MARR values at 5% intervals is as follows in the table

10

-962

Ans -(B)

Assumptions-

1 'n' is the asset life parameter.

2 select 2-year increments to evaluate PW sensitivity over the range 8 years to 12 years.

3 PW is the measure of the worth

4 set up the same PW relation as in part (A) at i=15%

explanation-

the PW results are.

MARR PW

10

27830 15 11512 20

-962

25 -10711

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