Goal of the Exercise is to be Familiar with the MARR. Minimum Attractive Rate of Return (MARR) is just the lowest internal rate of return the organization would consider to be a good investment A new LED lighting system will save 10,000JD/year. How much can I pay and still get a 15% rate of return? Life = 6 years. P = ?

Goal of the Exercise is to be Familiar with the MARR. Minimum Attractive Rate of Return (MARR) is just the lowest internal rate of return the organization would consider to be a good investment A new LED lighting system will save 10,000JD/year. How much can I pay and still get a 15% rate of return? Life = 6 years. P = ?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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Just because a project’s payback period is relatively long doesn’t mean it is not profitable in the long run. Consider an investment in LED lights with a price tag of $239,000. The estimated annual savings in electricity and routine maintenance is $40,300 and the life of the LED lights is 20 years. Solve, a. What is the simple payback period for the lights? b. What is the IRR of this investment? c. What do you conclude from Part (a) and Part (b)?
Q. 3. You have an opportunity to install solar panels on your home. The upfront cost of installing the system is $30,000 and the system is expected to save you $140 per month in electricity costs. The expected lifetime of the system is 25 years. a) Write down the formula for the internal rate of return on this project. b) Use Excel to graph the internal rate of return at different discount rates, ranging from 0% to 10%. Attach your graph. c) Over the last 20 years the rate of return on the U.S. stock market has been an average of 7% (using the annual rate of growth in the Wilshire 5000 index). Given that you could invest your $30,000 in the stock market, does the investment in solar panels make sense from an economic perspective? Why or why not? d) How high would the monthly electricity savings need to be to justify this investment if the internal rate of return needed to be at least 7%.
2. A potential software project will cost $17000 now, $2000 one year from now, $1000 2 years from now, and $1000 3 years from now. It will provide benefits of $28000 after it is installed 1 year from now, $30000 2 years from now, and $35000 3 years from now. Calculate the Present Value of the costs and benefits for each year and the overall Net Present Value of the project. Use a discount rate of 3%. (Hint: set up a spreadsheet...) Year 0 SO ? Benefits PV of Benefits Costs PV of Costs ? $17,000 Year 1 $28,000 ? Show Transcribed Text $2,000 ? Year 2 $30,000 ? $1,000 ? Year 3 $35,000 ? $1,000 ? Net Present Value (NPV) = Total PV of Benefits - Total PV of Costs Total Benefits Total Costs 3. The Payback Period is the length of time required to recover the cost of an investment. Management uses Payback Period to assess the risk of an investment - the longer the Payback Period, the higher the investment risk. What is the Payback Period for the project in question #2 above? 4. What is the ROI…
Just because a project's payback period is relatively long doesn't mean it is not profitable in the long run. Consider an investment in LED lights with a price tag of $242,000. The estimated annual savings in electricity and routine maintenance is $39,300 and the life of the LED lights is 22 years. Assume that the payback period of three years or less is desired by the investor. a. What is the simple payback period for the lights? b. What is the IRR of this investment? c. What do you conclude from Part (a) and Part (b)? a. The simple payback period is b. The IRR of the investment is c. Select all that apply. years. (Round to one decimal place.) %. (Round to one decimal place.) A. The IRR will signal an acceptable (profitable) project if the MARR is less than the IRR. B. The value of indicates a poor project in terms of liquidity. C. The value of indicates the best project in terms of liquidity. D. The IRR will signal an acceptable (profitable) project if the MARR is higher than the…
3) You have an opportunity to install solar panels on your home. The upfront cost of installing the system is $30,000 and the system is expected to save you $140 per month in electricity costs. The expected lifetime of the system is 25 years. a) Write down the formula for the internal rate of return on this project. b) Use Excel to graph the internal rate of return at different discount rates, ranging from 0% to 10%. Attach your graph. c) Over the last 20 years the rate of return on the U.S. stock market has been an average of 7% (using the annual rate of growth in the Wilshire 5000 index). Given that you could invest your $30,000 in the stock market, does the investment in solar panels make sense from an economic perspective? Why or why not? d) How high would the monthly electricity savings need to be to justify this investment if the internal rate of return needed to be at least 7%.
Just because a project's payback period is relatively long doesn't mean it is not profitable in the long run. Consider an investment in LED lights with a price tag of $236,000. The estimated annual savings in electricity and routine maintenance is $39,500 and the life of the LED lights is 18 years. Assume that the payback period of three years or less is desired by the investor. a. What is the simple payback period for the lights? b. What is the IRR of this investment? c. What do you conclude from Part (a) and Part (b)? a. The simple payback period is years. (Round to one decimal place.)
True or false Suppose that a project has a unique IRR=20%. The hurdle rate is 25%. Your boss says this means you should accept this project.
EVALUATION o Given the following mutually-exclusive alternatives and a Minimum Attractive Rate of Return (MARR) of 7%, which should be chosen? o Solve as PV, FV and AW (3 separate analyses for each Design) and show which Design gets chosen in each. SHOW YOUR WORK (including cash flow diagram) with tool formulas, not tables at this time to ensure you're understanding the concepts. Year 0 1 23 4 5 Total Design A ($2500) $0 $0 $0 $0 $3100 $600 Design B ($2700) $650 $650 $650 $650 $700 $600 Design C ($3000) $250 $500 $750 $1000 $1250 $750
Hi, I am working on this problem. Can you please show a step-by-step solution without using excel? Innovation company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for 10 years; following that, the company will have to provie support costs expected to be $100,000 a year in perpetuity. What is the NPV if the cost of capital is 6%?
A computer call center is going to replace all of its incandescent lamps with more energy-efficient fluorescent lighting fixtures. The total energy savings are estimated to be $1,875 per year, and the cost of purchasing and installing the fluorescent fixtures is $4,900. The study period is five years, and terminal market values for the fixtures are negligible. Solve, a. What is the IRR of this investment? b. What is the simple payback period of the investment? c. Is there a conflict in the answers to Parts (a) and (b)?List your assumptions. d. The simple payback “rate of return” is 1/θ. How close does this metric come to matching your answer in Part (a)?
A computer call center is going to replace all of its incandescent lamps with more energy- efficient fluorescent lighting fixtures. The total energy savings are estimated to be $1,875 per year, and the cost of purchasing and installing the fluorescent fixtures is $4,900. The study period is five years, and terminal market values for the fixtures are negligible. Solve, a. What is the IRR of this investment? b. What is the simple payback period of the investment? c. Is there a conflict in the answers to Parts (a) and (b)?List your assumptions. d. The simple payback "rate of return" is 1/0. How close does this metric come to matching your answer in Part (a)?
You are evaluating two different systems: System A costs $45,000, has a three year life and costs $5,000 per year to operate. System B costs $65,000, has a five year life and costs $4,000 per year to operate. If the required rate of return is 8%, which system would you prefer? I Next Slide