Homework Sourse1520 Chips USA is considering the following projects to impr
Solution
ANSWER:
IN ORDER TO KNOW WHICH PROJECTS ARE TO BE CHOSEN , WE WILL HAVE TO FIND THE IRR AND N = 3 YEARS AND FOR FINDING THE IRR, THE PW WILL BE EQUATED TO ZERO.
PW OF PROJECT 1 = FIRST COST + BENEFIT(P/A,I,N)
0 = -20,000 + 11,000(P/A,I,3)
20000 = 11,000(P/A,I,3)
I = 29.92%
PW OF PROJECT 2 = FIRST COST + BENEFIT(P/A,I,N)
0 = -30,000 + 14,000(P/A,I,3)
30000 = 14,000(P/A,I,3)
I = 18.91%
PW OF PROJECT 3 = FIRST COST + BENEFIT(P/A,I,N)
0 = -10,000 + 6,000(P/A,I,3)
10000 = 6,000(P/A,I,3)
I = 36.31%
PW OF PROJECT 4 = FIRST COST + BENEFIT(P/A,I,N)
0 = -5,000 + 2,400(P/A,I,3)
5000 = 2,400(P/A,I,3)
I = 20.71%
PW OF PROJECT 5 = FIRST COST + BENEFIT(P/A,I,N)
0 = -25,000 + 13,000(P/A,I,3)
25000 = 13,000(P/A,I,3)
I = 26.01%
PW OF PROJECT 6 = FIRST COST + BENEFIT(P/A,I,N)
0 = -15,000 + 7,000(P/A,I,3)
15000 = 7,000(P/A,I,3)
I = 18.91%
PW OF PROJECT 7 = FIRST COST + BENEFIT (P/A,I,N)
0 = -40,000 + 21,000(P/A,I,3)
40000 = 21,000(P/A,I,3)
I = 26.67%
SO THE IRR OF THE 7 PROJECTS ARE AS FOLLOWS:
PROJECT NO
1
2
3
4
5
6
7
IRR
29.92%
18.91%
36.31%
20.71%
26.01%
18.91%
26.67%
INITIAL COST
$20,000
$30,000
$10,000
$5,000
$25,000
$15,000
$40,000
SINCE ONLY $70,000 IS THE BUDGET, THEREFORE THE PROJECT 1, 3 AND 7 WHO HAVE THE 3 HIGHEST IRR AND A COMBINED INITIAL COST OF $70,000 WILL BE CHOSEN.
IF THESE 3 PROJECTS ARE CHOSEN, THEN THE PROJECT WITH THE NEXT IRR WILL BE OUR OPPORTUNITY COST OF CAPITAL WHICH IS PROJECT 5 WITH A IRR OF 26.01%
| PROJECT NO | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| IRR | 29.92% | 18.91% | 36.31% | 20.71% | 26.01% | 18.91% | 26.67% |
| INITIAL COST | $20,000 | $30,000 | $10,000 | $5,000 | $25,000 | $15,000 | $40,000 |
