Question

Consider a project that has the following cash flows over a study period of 4 years;...

Consider a project that has the following cash flows over a study period of 4 years;

Initial investment: $100,000

Annual revenues: $40,000

Annual expenses: $5,000

Salvage value: $20,000

Suppose ε=MARR=20%. What is ERR and is it profitable of not?

Select one:

a. 22.9% Profitable

b. 19.1% Not Profitable

c. 20.1% Not Profitable

d. 20.1% Profitable

e. 19.1% Profitable

f. 22.9% Not Profitable

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Homework Answers

Answer #1

The project is profitable if the external rate of return is higher than the MARR

We know the future worth of C0 at time t is C0*(1+r)^t

Now, we calculate the future worth of revenues and the present worth of investment to calculate the ERR.

Thus, the correct option is c. 20.1% Not Profitable

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