Question 2: Chapter 12 Project Acceptability Determination The following cash fl

Question

Question 2: Chapter 12 Project Acceptability Determination The following cash flows result from a potential construction contract for Erstwhile Engineering. 1. Receipts of $500 000 at the start of the contract and $1 200 000 at the end of the fourth year 2. Expenditures at the end of the first year of $400 000 and at the end of the second year of $900 000 3. A net cash flow of zero at the end of the third year Using an appropriate rate of return method, for a MARR of 25 percent, should Erstwhile Engineering accept this project?

Explanation / Answer

SOLUTION:

We are using ERR method

500,000 * (F/P, 25%, 4) + 1,200,000 = 400,000 * (F/P, i, 3) + 900,000 * (F/P, i, 2)

(5 * 2.4414) + 12 = 4 * (F/P, i, 3) + 9 * (F/P, i, 2)

4 * (F/P, i, 3) + 9 * (F/P, i, 2) = 24.207

When i = 25: LHS = (4 * 1.9531) + (9 * 1.5625) = 21.87

When i = 30: LHS = (4 * 2.197) + (9 * .69) = 23.00

As ERR is well above the MARR thus the project should be accepted.

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