question archive A Consider the following 5 investments

A Consider the following 5 investments

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A Consider the following 5 investments. Which one should be selected based upon the IRR. (10 pts) Assume that the MARR is .08

 

A

B

C

D

E

First costs

5000

2000

7000

3000

6500

Annual cash flows year 1 -4

900

200

1050

500

900

Year 5 cash flow

4000

1400

6300

2500

6300

b. Perform sensitivity analysis with decision reversal on the year 5 cash flows for the one you selected in part a.

Solve this in Excel and show all the formulas with answers

 

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ANSWER

a)

project A should be selected as it has the highest IRR

PROJECT 0 1 2 3 4 5 IRR  
A -5000 900 900 900 900 4000 12% =IRR(-5000,900,900,900,900,900)
B -2000 200 200 200 200 1400 2% =IRR(-2000,200,200,200,200,1400)
C -7000 1050 1050 1050 1050 6300 11% =IRR(-7000,1050,1050,1050,1050,6300)
D -3000 500 500 500 500 2500 11% =IRR(-3000,500,500,500,500,2500)
E -6500 900 900 900 900 6300 11% =IRR(-6500,900,900,900,900,6300)

b)

PROJECT 0 1 2 3 4 5 IRR
A -5000 900 900 900 900 9000 25%
B -2000 200 200 200 200 3400 18%
C -7000 1050 1050 1050 1050 13300 24%
D -3000 500 500 500 500 5500 25%
E -6500 900 900 900 900 13300 25%

now there is a conflict between A , D AND E project with lowest initial value is considerd i.e. project D

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