You are given the cash flow series for two projects, Alt. A and Alt. B. YEAR 1 2 3 4 5 6 Alt. A - F1 X X X + S1 Alt. B - F2 Y Y Y Y Y Y + S2 Assume that F2 > F1, and X, Y, S1, and S2 are positive; the incremental rate of return (i*) on the additional investment in Alt. B can be calculated with the following expression: = - = - = - · F2 + Y (P/A, i*, 6) + S2(P/F, i*, 6) (F2 F1) + (Y - X)(P/A, i*, 5) + (S2 - S1)(P/F, i*, 6) (F2 F1)(F/P, i*, 6) + (Y - X)(F/A, i*, 6) + (S2 - S1) (F2 F1)+(Y - X) + (Y + S2) - (X + S1) 0 = (F1 F2)(F/P, i*, 6) + (X - Y)(F/A, i*, 6) + (S2-S1) == 0 = F1 + X(P/A, i*, 6) + S1(P/F, i*, 6) 0F2+Y(P/A, i*, 6) + S2(P/F, i*, 6) 0 = - 0 = - F1 + X(P/A, i*, 5) + S1(P/F, i*, 6) F2+ Y(P/A, i*, 5) + S2(P/F, i*, 6)
You are given the cash flow series for two projects, Alt. A and Alt. B. YEAR 1 2 3 4 5 6 Alt. A - F1 X X X + S1 Alt. B - F2 Y Y Y Y Y Y + S2 Assume that F2 > F1, and X, Y, S1, and S2 are positive; the incremental rate of return (i*) on the additional investment in Alt. B can be calculated with the following expression: = - = - = - · F2 + Y (P/A, i*, 6) + S2(P/F, i*, 6) (F2 F1) + (Y - X)(P/A, i*, 5) + (S2 - S1)(P/F, i*, 6) (F2 F1)(F/P, i*, 6) + (Y - X)(F/A, i*, 6) + (S2 - S1) (F2 F1)+(Y - X) + (Y + S2) - (X + S1) 0 = (F1 F2)(F/P, i*, 6) + (X - Y)(F/A, i*, 6) + (S2-S1) == 0 = F1 + X(P/A, i*, 6) + S1(P/F, i*, 6) 0F2+Y(P/A, i*, 6) + S2(P/F, i*, 6) 0 = - 0 = - F1 + X(P/A, i*, 5) + S1(P/F, i*, 6) F2+ Y(P/A, i*, 5) + S2(P/F, i*, 6)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:You are given the cash flow series for two projects, Alt. A and Alt. B.
YEAR
1
2
3
4
5
6
Alt. A
- F1
X
X
X + S1
Alt. B
- F2
Y
Y
Y
Y
Y
Y + S2
Assume that F2 > F1, and X, Y, S1, and S2 are positive; the incremental rate of return (i*) on the additional investment in Alt. B
can be calculated with the following expression:
= -
= -
= -
· F2 + Y (P/A, i*, 6) + S2(P/F, i*, 6)
(F2 F1) + (Y - X)(P/A, i*, 5) + (S2 - S1)(P/F, i*, 6)
(F2 F1)(F/P, i*, 6) + (Y - X)(F/A, i*, 6) + (S2 - S1)
(F2 F1)+(Y - X) + (Y + S2) - (X + S1)
0 = (F1 F2)(F/P, i*, 6) + (X - Y)(F/A, i*, 6) + (S2-S1)
==
0 = F1 + X(P/A, i*, 6) + S1(P/F, i*, 6)
0F2+Y(P/A, i*, 6) + S2(P/F, i*, 6)
0 = -
0 = -
F1 + X(P/A, i*, 5) + S1(P/F, i*, 6)
F2+ Y(P/A, i*, 5) + S2(P/F, i*, 6)
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