Engineering Economic Analysis 12th Edition Problem 983 Requi

Engineering Economic Analysis 12th Edition, Problem 9-83: Requires Excel table and sensitivity graph. Thanks!

9-83 Assume a cost improvement project has only a first cost of $100,000 and a monthly net savings, M. There is no salvage value. Graph the project\'s IRR for payback periods from 6 months to the project\'s life of N years. The firm accepts projects with a 2- year payback period or a 20% IRR. When are these standards consistent and when are they not? (a) Assume that N 3 years. (b) Assume that N 5 years. (c) Assume that N 10 years. (d) What recommendation do you have for the firm about its project acceptance criteria?

Solution

Cost: $100,000

Acceptance criteria: 2 year payback period or 20% IRR

a) If yearly savings is 50,000 then the 2 year payback period criteria is met and the IRR is 23%

b) 5 year - yearly savings of $33,500 will give IRR of 20% , however it will not meet the payback period criteria

c) 10 year - yearly savings of $23,500 will give IRR of 20% , however it will not meet the payback period criteria  

d) It should look at the payaback period as the NPV reduces as the time period increases.