Parts D, E and F. **Investment Portfolio Optimization - Educational Analysis**In addition to the original opportunity statement, CustomMetalworks has determined that investments 3 and 4 are mutually exclusive, and investment 5 is contingent on either investment 1 or 2 being funded.- **d. Selection of Alternatives:** Identify which investment alternatives should be selected given the conditions outlined.- **e. Present Worth Calculation:** Determine the present worth of the optimum investment portfolio.- **f. IRR Calculation:** Calculate the Internal Rate of Return (IRR) for the optimum investment portfolio.**Reevaluation of the Original Problem:**- **g. Determine the Optimum Portfolio with Varied Capital Limits:** Identify the optimum portfolio (including selected investments and their present worth) using the following capital limits: (1) the current limit on investment capital, (2) a limit increased by 20%, and (3) a limit decreased by 20%.- **h. Determine the Optimum Portfolio with Varied MARR:** Identify the optimum portfolio (stating the investments selected and their present worth) using the following Minimum Attractive Rate of Return (MARR): (1) the current MARR, (2) a MARR of 14.4%, and (3) a MARR of 9.6%. **12.02-PR004** CustomMetalworks is considering the expansion of their cable fabrication business for towers, rigging, winches, and many other uses. They have available $250,000 for investment and have identified the following *indivisible* alternatives, each of which will provide an exit with full return of the investment at the end of a 5-year planning horizon. Each year, CustomMetalworks will receive an annual return as noted below. MARR is 12%.| Investment | Initial Investment | Annual Return ||------------|--------------------|---------------|| 1 | $25,000 | $7,500 || 2 | $40,000 | $12,000 || 3 | $85,000 | $20,000 || 4 | $100,000 | $22,000 || 5 | $65,000 | $17,000 |For the original problem:a. Which alternatives should be selected by CustomMetalworks?b. What is the present worth for the optimum investment portfolio?c. What is the IRR for the optimum investment portfolio?

5 indivisible projects are given below:Each investment will provide an exit with full return of the investment at the end of 5-years. Available Budget = $250,000Develop all mutually exclusive bundles with a total initial investment that does not exceed the capital limit b = $250,000There are a total of 5 investments.Number of bundles for m investments = 2mHere, m=5Number of bundles = 25 = 32The 32 bundles are evaluated using excel below:The following result is obtained:Out of the 32 bundles, there are 29 feasible ones to evaluate if no constraints are imposed.ConstraintsConstraint 1: Investments 3 and 4 are mutually exclusive, meaning only one can be selected.Constraint 2: Investment 5 is contingent on either investment 1 or 2 being funded, meaning it can only be selected if either 1 or 2 is selected.Keeping in mind the given constraints only the following bundles are possible:Due to constraint 1, bundles marked in Yellow are not possible.Due to constraint 2, bundles marked in Blue are not possible.Also, we need not to consider the Do Nothing Bundle as it need not to be evaluated and we know it's value 0.Following 20 possible bundles are there:The Net Present Worth of the possible bundles will be calculated as shown below:The following values will be obtained:Selection of alternative with given constraintsThe alternative with the maximum PW of the bundle will be selected as highlighted below:Investment alternatives 1,2,4 and 5 should be selected.The optimum investment portfolio includes the investment 1,2,4 and 5.The net Present Worth of the optimum portfolio is highlighted in yellow below:The present worth for the optimum investment portfolio = $111,387.58IRR is a discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a particular project equal to zero.IRR can be thought of as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher estimated IRR value than other available options would still provide a much better chance of strong growth.Internal Rate of Return (IRR)The optimal investment portfolio includes investment 1,2,4 & 5. The portfolio's cash inflows and outflows are shown below:In the year 5, the annual return and salvage value are added to get the total cash inflow of year 5.IRR function of excel is used. The range of all values from year 0 to year 5 is selected. Then a guess % is provided as 15%. Now, the excel will provide the exact IRR of the optimal investment portfolio as shown below:The IRR of the optimal investment portfolio is 25.41%.If the IRR of a new project exceeds a company’s required rate of return(MARR), that project is desirable. If IRR falls below the required rate of return, the project should be rejected.d) Investment alternatives 1,2,4 and 5 should be selected within the given constraints.e) The present worth for the optimum investment portfolio = $111,387.58f) The IRR of the optimal investment portfolio is 25.41%.

Business

Economics

12.02-PR004 CustomMetalworks is considering the expansion of their cable fabrication business for towers, rigging, winches, and many other uses. They have available $250,000 for investment and have identified the following indivisible alternatives, each of which will provide an exit with full return of the investment at the end of a 5-year planning horizon. Each year, CustomMetalworks will receive an annual return as noted below. MARR is 12%. Investment Initial Investment Annual Return 1 2 3 4 5 $25,000 $40,000 $85,000 $100,000 $65,000 $7,500 $12,000 $20,000 $22,000 $17,000 For the original problem: a. Which alternatives should be selected by CustomMetalworks? b. What is the present worth for the optimum investment portfolio? c. What is the IRR for the optimum investment portfolio?

12.02-PR004 CustomMetalworks is considering the expansion of their cable fabrication business for towers, rigging, winches, and many other uses. They have available $250,000 for investment and have identified the following indivisible alternatives, each of which will provide an exit with full return of the investment at the end of a 5-year planning horizon. Each year, CustomMetalworks will receive an annual return as noted below. MARR is 12%. Investment Initial Investment Annual Return 1 2 3 4 5 $25,000 $40,000 $85,000 $100,000 $65,000 $7,500 $12,000 $20,000 $22,000 $17,000 For the original problem: a. Which alternatives should be selected by CustomMetalworks? b. What is the present worth for the optimum investment portfolio? c. What is the IRR for the optimum investment portfolio?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Parts D, E and F.

**Investment Portfolio Optimization - Educational Analysis**

In addition to the original opportunity statement, CustomMetalworks has determined that investments 3 and 4 are mutually exclusive, and investment 5 is contingent on either investment 1 or 2 being funded.

- **d. Selection of Alternatives:**
Identify which investment alternatives should be selected given the conditions outlined.

- **e. Present Worth Calculation:**
Determine the present worth of the optimum investment portfolio.

- **f. IRR Calculation:**
Calculate the Internal Rate of Return (IRR) for the optimum investment portfolio.

**Reevaluation of the Original Problem:**

- **g. Determine the Optimum Portfolio with Varied Capital Limits:**
Identify the optimum portfolio (including selected investments and their present worth) using the following capital limits: (1) the current limit on investment capital, (2) a limit increased by 20%, and (3) a limit decreased by 20%.

- **h. Determine the Optimum Portfolio with Varied MARR:**
Identify the optimum portfolio (stating the investments selected and their present worth) using the following Minimum Attractive Rate of Return (MARR): (1) the current MARR, (2) a MARR of 14.4%, and (3) a MARR of 9.6%.

**12.02-PR004** CustomMetalworks is considering the expansion of their cable fabrication business for towers, rigging, winches, and many other uses. They have available $250,000 for investment and have identified the following *indivisible* alternatives, each of which will provide an exit with full return of the investment at the end of a 5-year planning horizon. Each year, CustomMetalworks will receive an annual return as noted below. MARR is 12%.

| Investment | Initial Investment | Annual Return |
|------------|--------------------|---------------|
| 1 | $25,000 | $7,500 |
| 2 | $40,000 | $12,000 |
| 3 | $85,000 | $20,000 |
| 4 | $100,000 | $22,000 |
| 5 | $65,000 | $17,000 |

For the original problem:

a. Which alternatives should be selected by CustomMetalworks?

b. What is the present worth for the optimum investment portfolio?

c. What is the IRR for the optimum investment portfolio?

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