Imagineering, Inc., is considering an investment in CAD-CAM compatible design so
ID: 2740115 • Letter: I
Question
Imagineering, Inc., is considering an investment in CAD-CAM compatible design software with the cash flow profile shown in the table below. Imagineering’s MARR is 18 %/year.
a)What is the present worth of this investment (in millions)? (round answer to the nearest million
b)What is the decision rule for judging the attractiveness of investments based on present worth? (if PW>0, Accept, otherwise reject/if PW<0, Accept; otherwise reject)
c)Should Imagineering invest? (yes/no)
EOY 0 1 2 3 4 5 6 7 Cash Flows (M$) -$12 -$1 $5 $2 $5 $5 $2 $5Explanation / Answer
A) Considering MARR as 18%, the net present value of the cash flows is $-2.73 (Millions)
B)As the present worth is negative, the investment is not attractive
C)We need to calculate the internal rate of return in this project. Internal rate of return is calculated considering the NPV as zero. We use excel for the same.Type -12,-1,5,2,5,2,5 in cells a1, a2, A3, a4, a5, a6, a7 respectively. Now calculate =irr(a1:a7) . The result comes out to be 10.47%. As MARR is higher than IRR, Imagineering should not invest.
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