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    Analysis Period and Service Period

    Uploaded by

    salman
    This document discusses analysis periods and service periods for projects as well as unit costs and annual equivalent costs. It provides examples of costs for different projects including initial, renovation and maintenance costs. It calculates the total cost of one project as $7,926,846 over 15 years. Another example calculates the capitalized equivalent worth of a project with various costs over 15 years as $1,165,019. The document also provides an example to calculate the internal rate of return to determine which of two mutually exclusive projects with an initial $10,000 investment and 5 year service life would be a better option, finding the IRR of project A is 15.31%.

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    Analysis Period and Service Period

    Uploaded by

    salman
    14 views10 pages
    This document discusses analysis periods and service periods for projects as well as unit costs and annual equivalent costs. It provides examples of costs for different projects including initial, renovation and maintenance costs. It calculates the total cost of one project as $7,926,846 over 15 years. Another example calculates the capitalized equivalent worth of a project with various costs over 15 years as $1,165,019. The document also provides an example to calculate the internal rate of return to determine which of two mutually exclusive projects with an initial $10,000 investment and 5 year service life would be a better option, finding the IRR of project A is 15.31%.

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    Q2-REVIEW (1)

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    This document discusses analysis periods and service periods for projects as well as unit costs and annual equivalent costs. It provides examples of costs for different projects including initial, renovation and maintenance costs. It calculates the total cost of one project as $7,926,846 over 15 years. Another example calculates the capitalized equivalent worth of a project with various costs over 15 years as $1,165,019. The document also provides an example to calculate the internal rate of return to determine which of two mutually exclusive projects with an initial $10,000 investment and 5 year service life would be a better option, finding the IRR of project A is 15.31%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views10 pages

    Analysis Period and Service Period

    Uploaded by

    salman
    This document discusses analysis periods and service periods for projects as well as unit costs and annual equivalent costs. It provides examples of costs for different projects including initial, renovation and maintenance costs. It calculates the total cost of one project as $7,926,846 over 15 years. Another example calculates the capitalized equivalent worth of a project with various costs over 15 years as $1,165,019. The document also provides an example to calculate the internal rate of return to determine which of two mutually exclusive projects with an initial $10,000 investment and 5 year service life would be a better option, finding the IRR of project A is 15.31%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Analysis period and service period

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    Analysis period and service period

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    Analysis period and service period

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    Analysis period and service period

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    Unit cost

    5
    AEC

    6
    5.27:
    5% Costs
    N Initial Renovation Maintenance
    0 5,000,000
    15 y cycle 1,000,000
    Annual 100,000

    Total = 7,926,846

    7
    5.28: Capitalized Equivalent Worth

    8% Costs
    N Initial Rework Gear Maintenance Initial = 650,000
    0 650,000 Gear = 50000(p/f,8%,5)
    10 y cycle 100,000 Rework = (A/I) (a/f,5%,10) = (100000/8%)(a/f,8%,10)
    year 5 50,000 15 years, Annual = 30000(p/a,8%,15)
    first 15 yrs 30,000 After 15 years, Annual = (A/I) (p/f,5%,15) = (35000/8%)(p/f,8%,15)
    After 15 yrs 35,000 Total P = 1,165,019

    8
    IRR Mutually Exclusive Projects
    A small entrepreneur is considering investing in two project, A and B to meet the same
    business need.
    Project A requires an initial investment of $10,000, and has a service life of 5 years. At the
    end of the five years, project A will return the initial investment plus 10% of the investment
    compounded annually (positive cash flow).
    Project B also requires an initial investment of $10,000, and has a service life 5 years. From
    year 1 to year 5 project B will return 9% of the initial investment (positive cash flow). In
    addition in year 5, project B will also return the initial investment of $10,000 (positive cash
    flow).
    Which project is a better option? Assume that the entrepreneur’s MARR is 8%, and both
    these projects meet the individual IRR criteria.
    Solution Instructions:
     Analysis method: IRR. Other method will not be graded.
     Show your calculations in detail.
     Use 4 decimal points for the interest factors. Round off your final IRR answer to two decimal
    points.
     Hint: Use tables 7%,6%,15%,16%

    9
    IRR Solution

    N A B A-B Project A
    0 (10,000) (10,000) - F5 = 10000*(f/p,10%,5) = 16,105
    1 - 900 (900)
    2 - 900 (900) Project B
    3 - 900 (900) N1 to N4 = 10000(9%) = 900
    4 - 900 (900) N5 = 10000+900 = 10,900
    5 16,105 10,900 5,205

    PW A-B = -900(P/A,I,4)+5,205(P/F,I,5)

    % (P/A,i,4) (P/F,i,5) PW Win


    8 3.3121 0.6806 561.63 >0 Increaase i
    15 2.8550 0.4972 18.43 A
    16 2.7982 0.4761 (40.28)
    IRR 15.31

    10

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