1. Three groups of proposals are presented to management for selection. Proposal
ID: 2763176 • Letter: 1
Question
1. Three groups of proposals are presented to management for selection. Proposals with the same first letter are mutually exclusive. The available proposals are listed below.
Proposal
Initial
Investment
Net Annual
Income
A1
$ 5,000
$ 1,500
A2
$ 10,000
$ 2,553
A3
$ 18,000
$ 4,298
Proposal
Initial
Investment
Net Annual
Income
B1
$ 8,000
$ 2,350
B2
$ 17,850
$ 4,856
B3
$ 22,541
$ 5,879
B4
$ 33,000
$ 8,259
Proposal
Initial
Investment
Net Annual
Income
C1
$ 10,000
$ 2,589
C2
$ 29,000
$ 5,982
a) (10 points) The duration of each proposal is 6 years and the company MARR is 12%. If the total company budget for these proposals is $30,000, which proposals should be funded?
b) (10 points) The project durations must be shortened to 5 years. Which projects should be funded?
Proposal
Initial
Investment
Net Annual
Income
A1
$ 5,000
$ 1,500
A2
$ 10,000
$ 2,553
A3
$ 18,000
$ 4,298
Proposal
Initial
Investment
Net Annual
Income
B1
$ 8,000
$ 2,350
B2
$ 17,850
$ 4,856
B3
$ 22,541
$ 5,879
B4
$ 33,000
$ 8,259
Proposal
Initial
Investment
Net Annual
Income
C1
$ 10,000
$ 2,589
C2
$ 29,000
$ 5,982
Explanation / Answer
Answer 1 Calculation of Net present value of the proposals (Duration 6 years and MARR 12%) Year PV Factor @ 12% A1 A2 A3 Cash flow PV Cash flow PV Cash flow PV 0 1 -5,000 -5,000 -10,000 -10,000 -18,000 -18,000 1 0.892857143 1,500 1,339 2,553 2,279 4,298 3,838 2 0.797193878 1,500 1,196 2,553 2,035 4,298 3,426 3 0.711780248 1,500 1,068 2,553 1,817 4,298 3,059 4 0.635518078 1,500 953 2,553 1,622 4,298 2,731 5 0.567426856 1,500 851 2,553 1,449 4,298 2,439 6 0.506631121 1,500 760 2,553 1,293 4,298 2,178 NPV 1,167 496 -329 Year PV Factor @ 12% B1 B2 B3 B4 Cash flow PV Cash flow PV Cash flow PV Cash flow PV 0 1 -8,000 -8,000 -17,850 -17,850 -22,541 -22,541 -33,000 -33,000 1 0.892857143 2,350 2,098 4,856 4,336 5,879 5,249 8,259 7,374 2 0.797193878 2,350 1,873 4,856 3,871 5,879 4,687 8,259 6,584 3 0.711780248 2,350 1,673 4,856 3,456 5,879 4,185 8,259 5,879 4 0.635518078 2,350 1,493 4,856 3,086 5,879 3,736 8,259 5,249 5 0.567426856 2,350 1,333 4,856 2,755 5,879 3,336 8,259 4,686 6 0.506631121 2,350 1,191 4,856 2,460 5,879 2,978 8,259 4,184 NPV 1,662 2,115 1,630 956 Year PV Factor @ 12% C1 C2 Cash flow PV Cash flow PV 0 1 -10,000 -10,000 -29,000 -29,000 1 0.892857143 2,589 2,312 5,982 5,341 2 0.797193878 2,589 2,064 5,982 4,769 3 0.711780248 2,589 1,843 5,982 4,258 4 0.635518078 2,589 1,645 5,982 3,802 5 0.567426856 2,589 1,469 5,982 3,394 6 0.506631121 2,589 1,312 5,982 3,031 NPV 644 -4,406 The Proposal A1,B1 and C1 should be funded as this combination yields a highest NPV of $3473 compared to other combination and the total fund requirement for these projects $23000 is also within company's budget. Answer 2 Calculation of Net present value of the proposals (Duration 5 years and MARR 12%) Year PV Factor @ 12% A1 A2 A3 Cash flow PV Cash flow PV Cash flow PV 0 1 -5,000 -5,000 -10,000 -10,000 -18,000 -18,000 1 0.892857143 1,500 1,339 2,553 2,279 4,298 3,838 2 0.797193878 1,500 1,196 2,553 2,035 4,298 3,426 3 0.711780248 1,500 1,068 2,553 1,817 4,298 3,059 4 0.635518078 1,500 953 2,553 1,622 4,298 2,731 5 0.567426856 1,500 851 2,553 1,449 4,298 2,439 NPV 407 -797 -2,507 Year PV Factor @ 12% B1 B2 B3 B4 Cash flow PV Cash flow PV Cash flow PV Cash flow PV 0 1 -8,000 -8,000 -17,850 -17,850 -22,541 -22,541 -33,000 -33,000 1 0.892857143 2,350 2,098 4,856 4,336 5,879 5,249 8,259 7,374 2 0.797193878 2,350 1,873 4,856 3,871 5,879 4,687 8,259 6,584 3 0.711780248 2,350 1,673 4,856 3,456 5,879 4,185 8,259 5,879 4 0.635518078 2,350 1,493 4,856 3,086 5,879 3,736 8,259 5,249 5 0.567426856 2,350 1,333 4,856 2,755 5,879 3,336 8,259 4,686 NPV 471 -345 -1,349 -3,228 Year PV Factor @ 12% C1 C2 Cash flow PV Cash flow PV 0 1 -10,000 -10,000 -29,000 -29,000 1 0.892857143 2,589 2,312 5,982 5,341 2 0.797193878 2,589 2,064 5,982 4,769 3 0.711780248 2,589 1,843 5,982 4,258 4 0.635518078 2,589 1,645 5,982 3,802 5 0.567426856 2,589 1,469 5,982 3,394 NPV -667 -7,436 The Proposal A1,B1 and C1 should be funded as this combination yields a highest NPV of $211 compared to other combination and the total fund requirement for these projects $23000 is also within company's budget.
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