When the country’s economy is expanding, AB Investment Company is optimistic and expects a MARR of 15% on new investments. However, in a receding economy the expected return is 8%. Normally a 10% per year return is anticipated. An expanding economy causes the estimates of project life to go down about 20%, and a receding economy causes the life values to increase about 10%. Additionally, the market value after the project’s life varies widely; optimistically, it may be as high as 50% more or as low as 75% of the initial investment. (a) Summarize the optimistic, most likely, and pessimistic estimates in tabular form. (b) Use a spreadsheet to calculate and plot the sensitivity of PW versus (1) MARR, (2) life values, and (3) market value for possible investment in one of two locations. Use the most likely estimates for the other parameters. (c) Considering all the analyses, under which scenario, if any, should location Miami or Houston be rejected? All monetary values are in $1000 units. Location Miami Houston Initial investment, $ −100,000 −110,000 NCF, $ per year 15,000 19,000 Market value at project end, $ 100,000 110,000 Life, years 20 20
When the country’s economy is expanding, AB Investment
Company is optimistic and expects a
MARR of 15% on new investments. However, in a
receding economy the expected return is 8%. Normally
a 10% per year return is anticipated. An expanding
economy causes the estimates of project
life to go down about 20%, and a receding economy
causes the life values to increase about 10%.
Additionally, the market value after the project’s
life varies widely; optimistically, it may be as high
as 50% more or as low as 75% of the initial
investment.
(a) Summarize the optimistic, most likely, and
pessimistic estimates in tabular form.
(b) Use a spreadsheet to calculate and plot the
sensitivity of PW versus (1) MARR, (2) life
values, and (3) market value for possible investment
in one of two locations. Use the
most likely estimates for the other parameters.
(c) Considering all the analyses, under which
scenario, if any, should location Miami or
Houston be rejected?
All monetary values are in $1000 units.
Location Miami Houston
Initial investment, $ −100,000 −110,000
NCF, $ per year 15,000 19,000
Market value at project end, $ 100,000 110,000
Life, years 20 20
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