1. Consider the following two investment alternatives
|
|
Net cash flow
|
|
|
End of year
|
Machine A
|
Machine B
|
|
0
|
-$2,800
|
-2000
|
|
1
|
-1900
|
-2500
|
|
2
|
-1800
|
-2000
|
|
3
|
-1700
|
+200
|
Suppose that your firm needs either machine for only 2 years. The net proceeds from the sale of machine B are estimated to be $200. What should be the net proceeds from the sale of machine A so that both machines could be considered economically indifferent at an interest rate of 10%?
2. Consider the following two mutually exclusive investment proposals.
|
End of year
|
Project A1
|
Project A2
|
|
0
|
-200
|
-300
|
|
1
|
200
|
440
|
|
2
|
243
|
100
|
|
Rate of Return
|
71.03%
|
66.66%
|
a) Determine the range of MARR where project A1 is preferred over project A2
b) If you use the NPW criterion at Marr=15%, project A2 will be selected. Using the internal rate of return criterion, demonstrate that you will select the same project at MARR of 15%. In doing so, determine the return on invested capital.