Problems

1-The cash flow of an investment is shown below. What is the rate of return for this investment (i.e., IRR or ROR)? Calculate the rate to two digits.

2- A local corporation purchased a system for $1 million. The net income from operating this system is $300,000 per year. Assuming a life of five years and no salvage value, what is the rate of return of this system?

3 - Darbol Corporation received two investment proposals. The estimate of the financial situation of each proposal is presented in the following table. Darbol also has the choice of investing the capital and receiving an interest rate of10% annually.

Using the ROR method, perform the financial analysis and make your recommendation as to which of the proposals, if any, they should accept.

Data

Proposal A

Proposal B

Initial Cost

$50,000

$140,000

Salvage Value

$20,000

$30,000

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(table continued from previous page)

Data

Proposal A

Proposal B

Annual Benefit $30,000

$40,000

Annual Cost

$15,000

$10,000

Life

3 years

6 years

4-An investor is about to make an investment of $45,000 in equipment that will bring a net annual income of $20,000. The equipment will last for only three years, has no resale value, and removal cost is negligible. An engineer suggests an improvement in the equipment that will cost $35,000 and will extend its life to six years but will not change the annual income. The equipment will have no resale value after the six-year life; the removal cost is again negligible. The investor has MARR of 10%. Use the rate of return method to make a recommendation to him. Explain your reasons for recommendation.

5- The following two proj ects are recommended for investment:

a. Initial investment $800K, annual income $400K

b. Initial investment $1,500K, annual income $700K

The lives of both projects are five years. The investor has a MARR of 30%. Using the ROR method, make a recommendation.

6- Mr. Friendly, a friend of yours, is asked to invest in the following project:

Installation and operation of a facility with a life span of five years. The initial investment is $90M. It will have a net profit of $25M/Yr the first two years and $30M/Yr in years 3,4, and 5. At the end of year 5, it has to be disposed of at a cost of $10M with no resale value.

a. If he has the money and his opportunity cost of money is 10% (i=10%), would you advise him to invest or not? Yes? No? Why? Explain.

b. He can only put down $33M, and his bank will extend him a loan for the rest of the initial investment to be used on this project at 15% in a way that he has to pay it back in equal installments at the end of each of the five years with no collateral. Should he take the loan and invest? Yes? No? Why? Explain.

7- Production equipment is bought at an initial price of $10,000. The annual operation and maintenance cost is $100. The salvage value at the end of the 15-year life is $500. If the equipment brings in an income of $1,100 per month, what is the rate of return for this project?

8- Members of the board at ACE Corporation received three proposals for a machine they may want to purchase. They also have a choice of investing their capital and receiving an interest rate of 15% annually. Using the following data, what is their most economical course of action? Use a 10-year life span.

Data Machine A Machine B Machine C

Initial Cost

$180,000 $235,000

$200,000

Salvage Value $38,300 $44,800

$14,400

Annual Benefit $75,300 $89,000

$68,000

Annual Cost

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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