Module 4 - NPV, AEW

Question 1

What makes a good decision criteria?

Answer 1

• Does it adjust for time value of money?
• Does it adjust for risk?
• Does it provide info on whether we’re creating value?

Question 2

What is independent vs mutually exclusive?

Answer 2

Independent: unrelated investment opportunities
Mutually Exclusive: choosing one project automatically results in rejection of other projects

Question 3

What are the pros/cons of the payback method?

Answer 3

(+) easy to use/understand, biased towards liquidity, not subject to later cash flows (uncertainty)
(-) ignores time value, ignores project specific risk, arbitrary cutoff point, ignores later cash flows, biased towards short term

Question 4

What is net present worth analysis?

Answer 4

Moves cash flows to present value using MARR and checks if >$0

Question 5

What is MARR?

Answer 5

Minimal Acceptable rate of return

Question 6

A company needs a piece of equipment to run for 5 years and has 2 options with MARR of 10%
Model I: $15,000 cost w/ $5,000/yr
Model II: $20,000 cost w/ $6,250/yr

Which should they choose?

Answer 6

Model I - $3,953.93

Question 7

What is the Capital Equivalent Method?

Answer 7

Used when life of project is perpetual or very long (>40 years)
PW=A/i

Question 8

What are revenue projects vs service projects?

Answer 8

Revenue: investment generates revenue in future -> NPV>0

Service: revenue irrelevant to project, choose least negative NPV

Question 9

What are the 2 applications of investment criteria?

Answer 9

Total Investment approach: choose highest NPV

Incremental Approach: Total doesn’t work for B/C ratio or IRR

Question 10

What do the annual equivalent worth?

Answer 10

Determining the equal, annual payments or earnings of a project

Question 11

A company wants to invest in solar panels which need to be replaced every 5 years. If the initial cost of the cells is $500,000 and saves them $250,000 the first year but decreases by $50,000 each year, what is the projects AEW with MARR=10%

Answer 11

$27,594.96

Question 12

What are Capital Recovery Costs?

Answer 12

When analyzing a project and only taking the costs into consideration. Can be used to find value per km or unit

Question 13

What is the capital recovery of equipment with a cost of $130,000 and a salvage value of $25,000 after 5 years if the MARR is 15%

Answer 13

$35,073