Your Initials: When the country\'s economy is expanding, AB Investment Company i

Question

Your Initials: When the country's economy is expanding, AB Investment Company is optimistic and mcts a MARR of 15% for new investments. However, in a receding economy MARR is and normally MARR is 10%. The life of each plane is 20 years, however, an expanding economy causes the estimates of asset life to go down about 20% and areceding economy makes the n values increase about 10%. (25 points) Plan M Plan Q lnitial investment. 5 100,000 110.000 Cash flow, Vyear +15,000 +19,000 Life, years 20 20 (a)lf the life is 20 years, determine the sentivity of the MARR (three values) with repect to the present worth of the two plans (10 points) 10 (2 points) (b) Is the present worth for plan M sensitive to the MARR?

Explanation / Answer

(a) Compound interest factors

(P/A,8%,20) = 9.818

(P/A,10%,20) = 8.514

(P/A,15%,20) = 6.259

For MARR = 8%

Present Worth of plan M = -100000 + 15000*9.818 = $ 47,270

Present Worth of plan Q = -110000 + 19000*9.818 = $ 76,542

For MARR = 10%

Present Worth of plan M = -100000 + 15000*8.514 = $ 27,710

Present Worth of plan Q = -110000 + 19000*8.514 = $ 51,766

For MARR = 15%

Present Worth of plan M = -100000 + 15000*6.259 = $ - 6,115

Present Worth of plan Q = -110000 + 19000*6.259 = $ 8,921

(b) Yes, the present worth for plan M is sensitive to MARR. it becomes negative as MARR increases to 15%

(c) For MARR = 10%,

(P/A,10%,16) = 7.824

(P/A,10%,20) = 8.514

(P/A,10%,22) = 8.772

For asset life of 16 years (20% lower),

PW of plan M = -100000+15000*7.824 = $ 17.360

PW of plan Q = -110000+19000*7.824 = $ 38,656

For asset life of 20 years (normal),

PW of plan M = -100000+15000*8.514 = $ 27,710

PW of plan Q = -110000+19000*8.514 = $ 51,766

For asset life of 22 years (10% higher),

PW of plan M = -100000+15000*8.772 = $ 31,580

PW of plan Q = -110000+19000*8.772 = $ 56,668

(d) I would select plan Q for all the scenarios , because it gives higher present worth

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