swebdav/pid-685940-dt-content-id-6435008 Tycourses-T ENGl260 299510oseha Example
ID: 2810332 • Letter: S
Question
swebdav/pid-685940-dt-content-id-6435008 Tycourses-T ENGl260 299510oseha Example # 18: Urban Development Corporation Two alternative investment proposals are under consideration for a vacant owner by Urban Development Corporation. Plan A would require an immediate investment of $120,000 and first-year expenditure for property taxes, maintenance, and insurance of $4,000, with this amount expected to increase at a rate of S1,000 per year. Plan B would have a first cost of S170,000 and total first-year expenses of $9,000, with an increase of $1,000 per year. The economic life of each project is forecast to be 10 years; and at the end of this time, only the facilities from Plan B with a value of $50,000 are expected to salvage. During the life of the project, the facility in plan A is expected to produce $34,000 annually, whereas Plan B is expected to produce $42,000. a) Determine the rate of return of each plan. b) Determine the rate of return of the Additional investment required in Plan B compared with Plan A. c Which plan should Urban Development select if the company uses a MARR of 12 percent? pause break sysraExplanation / Answer
Option A
Year
annual revenue
annual expense
net annual revenue
0
-120000
1
34000
4000
30000
2
34000
5000
29000
3
34000
6000
28000
4
34000
7000
27000
5
34000
8000
26000
6
34000
9000
25000
7
34000
10000
24000
8
34000
11000
23000
9
34000
12000
22000
10
34000
13000
21000
IRR = Using IRR function in MS excel
18.12%
Average return =Using average function in MS excel
25500
Initial Investment
120000
rate of return = average return/initial investment
21.25%
Option B
Year
annual revenue
annual expense
net annual revenue
0
-170000
1
42000
9000
33000
2
42000
10000
32000
3
42000
11000
31000
4
42000
12000
30000
5
42000
13000
29000
6
42000
14000
28000
7
42000
15000
27000
8
42000
16000
26000
9
42000
17000
25000
10
92000
18000
74000
IRR = Using IRR function in MS excel
13.66%
Average return =Using average function in MS excel
33500
Initial Investment
170000
rate of return = average return/initial investment
19.71%
Cross over rate
Year
net annual revenue
net annual revenue
excess return of B over A
0
-170000
120000
-50000
1
38000
30000
8000
2
37000
29000
8000
3
36000
28000
8000
4
35000
27000
8000
5
34000
26000
8000
6
33000
25000
8000
7
32000
24000
8000
8
31000
23000
8000
9
30000
22000
8000
10
79000
21000
58000
interenal rate of return on additional investment in Machine B
Using IRR function in MS excel
16%
Average return =Using average function in MS excel
13000
Initial Investment
50000
rate of return = average return/initial investment
26.00%
IRR
average rate of return
MARR
Plan A
18.12%
21.25%
12%
A can be selected
Plan B
13.66%
19.71%
12%
B can be selected
As MARR is 12% and IRR and average rate of return is more than MARR so both the options can be selected but as IRR and average return of A is greater than B so it should be selected
Option A
Year
annual revenue
annual expense
net annual revenue
0
-120000
1
34000
4000
30000
2
34000
5000
29000
3
34000
6000
28000
4
34000
7000
27000
5
34000
8000
26000
6
34000
9000
25000
7
34000
10000
24000
8
34000
11000
23000
9
34000
12000
22000
10
34000
13000
21000
IRR = Using IRR function in MS excel
18.12%
Average return =Using average function in MS excel
25500
Initial Investment
120000
rate of return = average return/initial investment
21.25%
Option B
Year
annual revenue
annual expense
net annual revenue
0
-170000
1
42000
9000
33000
2
42000
10000
32000
3
42000
11000
31000
4
42000
12000
30000
5
42000
13000
29000
6
42000
14000
28000
7
42000
15000
27000
8
42000
16000
26000
9
42000
17000
25000
10
92000
18000
74000
IRR = Using IRR function in MS excel
13.66%
Average return =Using average function in MS excel
33500
Initial Investment
170000
rate of return = average return/initial investment
19.71%
Cross over rate
Year
net annual revenue
net annual revenue
excess return of B over A
0
-170000
120000
-50000
1
38000
30000
8000
2
37000
29000
8000
3
36000
28000
8000
4
35000
27000
8000
5
34000
26000
8000
6
33000
25000
8000
7
32000
24000
8000
8
31000
23000
8000
9
30000
22000
8000
10
79000
21000
58000
interenal rate of return on additional investment in Machine B
Using IRR function in MS excel
16%
Average return =Using average function in MS excel
13000
Initial Investment
50000
rate of return = average return/initial investment
26.00%
IRR
average rate of return
MARR
Plan A
18.12%
21.25%
12%
A can be selected
Plan B
13.66%
19.71%
12%
B can be selected
As MARR is 12% and IRR and average rate of return is more than MARR so both the options can be selected but as IRR and average return of A is greater than B so it should be selected
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.