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A decision maker is faced with a choice between two projects, both of which have start-up costs in the irst year of $150m and project closing costs of $20m in year 5. Project A is expected to generate net eturns of $10m, $20m, $50m and $200m from year 2 to year 5 respectively. Project B is expected to generate net returns of $100m, $80m, $50m, and $20m for year 2 to year 5 respectively. a) Show whether these projects are viable at discount rates of 1% and 10%. b) Show which project is preferred at 1% and which at 10%. c) Offer an intuitive explanation for your preferences at different interest rates d) If these are public sector projects, state two other considerations that could affect the choice of the project.

A decision maker is faced with a choice between two projects, both of which have start-up costs in the irst year of $150m and project closing costs of $20m in year 5. Project A is expected to generate net eturns of $10m, $20m, $50m and $200m from year 2 to year 5 respectively. Project B is expected to generate net returns of $100m, $80m, $50m, and $20m for year 2 to year 5 respectively. a) Show whether these projects are viable at discount rates of 1% and 10%. b) Show which project is preferred at 1% and which at 10%. c) Offer an intuitive explanation for your preferences at different interest rates d) If these are public sector projects, state two other considerations that could affect the choice of the project.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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A decision maker is faced with a choice between two projects, both of which have start-up costs in the first year of $150m and project closing costs of $20m in year 5. Project A is expected to generate net returns of $10m, $20m, $50m and $200m from year 2 to year 5 respectively. Project B is expected to generate net returns of $100m, $80m, $50m, and $20m for year 2 to year 5 respectively. a) Show whether these projects are viable at discount rates of 1% and 10%. b) Show which project is preferred at 1% and which at 10%. c) Offer an intuitive explanation for your preferences at different interest rates d) If these are public sector projects, state two other considerations that could affect the choice of the project.
Transcribed Image Text:A decision maker is faced with a choice between two projects, both of which have start-up costs in the first year of $150m and project closing costs of $20m in year 5. Project A is expected to generate net returns of $10m, $20m, $50m and $200m from year 2 to year 5 respectively. Project B is expected to generate net returns of $100m, $80m, $50m, and $20m for year 2 to year 5 respectively. a) Show whether these projects are viable at discount rates of 1% and 10%. b) Show which project is preferred at 1% and which at 10%. c) Offer an intuitive explanation for your preferences at different interest rates d) If these are public sector projects, state two other considerations that could affect the choice of the project.
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