Question

There are four projects to consider that have the following net yearly cash flows.

0

1

2

3

4

5

6

P1

-3000

-500

1000

2000

4000

P2

-1000

-1000

500

0

400

500

2000

P3

-4000

2000

-3000

5000

7000

1000

P4

-2000

-4000

-1000

8000

1000

The MARR for this company is 12%.

a) You can select up to two projects to complete. Which projects would you recommend?

b) Management has imposed a time limit of 4 years for the projects. What is the implied salvage value for projects 2 and 3?

Answer 1

Years	P1	P2	P3	P4
0	-3000	-1000	-4000	-2000
1	-500	-1000	2000	-4000
2	1000	500	-3000	-1000
3	2000	0	5000	8000
4	4000	400	7000	1000
5		500	1000
6		2000
IRR	24%	13%	37%	12%
NPV	? 1,316.40	? -1,240.05	? 3,401.66	? -38.86

a) Since the time limit is for 4 years, running NPV and IRR for 4 years cashflow, we find that P1 and P3 can be selected

b) The implied salvage value for projects 2 and 3 are 2000 and 3000 respectively