ENGINEERING ECO ANALYSIS W/STUDY GUIDE
13th Edition
ISBN: 9780190693053
Author: NEWNAN
Publisher: Oxford University Press
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Question
Chapter 8, Problem 9P
To determine
i.
Choice Table for interest rate from 0% to 100%.
Expert Solution
Answer to Problem 9P
Till 13% interest rate, Combined stores are beneficial
From 13% to 100%, South end store is profitable.
Explanation of Solution
Given:
Annual Profit = $370000
Leasing Period = 5 years
Expenditure on store fixtures = $1200000
Combined Profit = $560000.
Calculation:
Formula:
R is the net
i is the required
n are the number of periods during which the project is expected to operate and generate cash inflows.
For illustration, let’s assume that the interest rate is 1% and calculate the NPV for combined stores:
NPV =
| Year | Cash Flow from South end | Combined Cash Flow |
| 0 | 0 | -1200000 |
| 1 | 370000 | 560000 |
| 2 | 370000 | 560000 |
| 3 | 370000 | 560000 |
| 4 | 370000 | 560000 |
| 5 | 370000 | 1560000 |
| Interest Rate | NPV for South End | NPV for Combined stores |
| 0% | $1,850,000.00 | $2,600,000.00 |
| 1% | $1,795,769.56 | $2,469,387.18 |
| 2% | $1,743,980.02 | $2,345,268.13 |
| 3% | $1,694,491.66 | $2,227,244.81 |
| 4% | $1,647,174.26 | $2,114,947.61 |
| 5% | $1,601,906.37 | $2,008,033.10 |
| 6% | $1,558,574.60 | $1,906,181.89 |
| 7% | $1,517,073.05 | $1,809,096.74 |
| 8% | $1,477,302.71 | $1,716,500.82 |
| 9% | $1,439,170.97 | $1,628,136.09 |
| 10% | $1,402,591.10 | $1,543,761.91 |
| 11% | $1,367,481.90 | $1,463,153.66 |
| 12% | $1,333,767.19 | $1,386,101.53 |
| 13% | $1,301,375.57 | $1,312,409.44 |
| 14% | $1,270,239.96 | $1,241,894.01 |
| 15% | $1,240,297.39 | $1,174,383.59 |
| 16% | $1,211,488.65 | $1,109,717.46 |
| 17% | $1,183,758.08 | $1,047,745.00 |
| 18% | $1,157,053.28 | $988,324.99 |
| 19% | $1,131,324.91 | $931,324.91 |
| 20% | $1,106,526.49 | $876,620.37 |
| 21% | $1,082,614.20 | $824,094.52 |
| 22% | $1,059,546.71 | $773,637.52 |
| 23% | $1,037,285.00 | $725,146.08 |
| 24% | $1,015,792.23 | $678,523.01 |
| 25% | $995,033.60 | $633,676.80 |
| 26% | $974,976.19 | $590,521.24 |
| 27% | $955,588.89 | $548,975.08 |
| 28% | $936,842.24 | $508,961.70 |
| 29% | $918,708.35 | $470,408.80 |
| 30% | $901,160.81 | $433,248.14 |
| 31% | $884,174.57 | $397,415.25 |
| 32% | $867,725.90 | $362,849.23 |
| 33% | $851,792.28 | $329,492.50 |
| 34% | $836,352.32 | $297,290.57 |
| 35% | $821,385.73 | $266,191.90 |
| 36% | $806,873.22 | $236,147.69 |
| 37% | $792,796.46 | $207,111.70 |
| 38% | $779,138.04 | $179,040.13 |
| 39% | $765,881.36 | $151,891.43 |
| 40% | $753,010.65 | $125,626.23 |
| 41% | $740,510.89 | $100,207.12 |
| 42% | $728,367.78 | $75,598.62 |
| 43% | $716,567.67 | $51,767.02 |
| 44% | $705,097.58 | $28,680.30 |
| 45% | $693,945.10 | $6,308.00 |
| 46% | $683,098.42 | -$15,378.80 |
| 47% | $672,546.25 | -$36,407.67 |
| 48% | $662,277.81 | -$56,804.80 |
| 49% | $652,282.82 | -$76,595.14 |
| 50% | $642,551.44 | -$95,802.47 |
| 51% | $633,074.27 | -$114,449.42 |
| 52% | $623,842.33 | -$132,557.59 |
| 53% | $614,847.02 | -$150,147.54 |
| 54% | $606,080.11 | -$167,238.91 |
| 55% | $597,533.73 | -$183,850.44 |
| 56% | $589,200.35 | -$200,000.00 |
| 57% | $581,072.73 | -$215,704.67 |
| 58% | $573,143.97 | -$230,980.76 |
| 59% | $565,407.43 | -$245,843.85 |
| 60% | $557,856.75 | -$260,308.84 |
| 61% | $550,485.83 | -$274,389.98 |
| 62% | $543,288.83 | -$288,100.89 |
| 63% | $536,260.12 | -$301,454.62 |
| 64% | $529,394.32 | -$314,463.64 |
| 65% | $522,686.24 | -$327,139.90 |
| 66% | $516,130.92 | -$339,494.84 |
| 67% | $509,723.57 | -$351,539.44 |
| 68% | $503,459.61 | -$363,284.20 |
| 69% | $497,334.62 | -$374,739.19 |
| 70% | $491,344.34 | -$385,914.07 |
| 71% | $485,484.70 | -$396,818.12 |
| 72% | $479,751.76 | -$407,460.22 |
| 73% | $474,141.74 | -$417,848.91 |
| 74% | $468,650.99 | -$427,992.38 |
| 75% | $463,276.02 | -$437,898.49 |
| 76% | $458,013.42 | -$447,574.82 |
| 77% | $452,859.96 | -$457,028.63 |
| 78% | $447,812.48 | -$466,266.88 |
| 79% | $442,867.97 | -$475,296.31 |
| 80% | $438,023.51 | -$484,123.36 |
| 81% | $433,276.27 | -$492,754.24 |
| 82% | $428,623.55 | -$501,194.92 |
| 83% | $424,062.71 | -$509,451.17 |
| 84% | $419,591.25 | -$517,528.51 |
| 85% | $415,206.70 | -$525,432.28 |
| 86% | $410,906.71 | -$533,167.60 |
| 87% | $406,689.01 | -$540,739.44 |
| 88% | $402,551.38 | -$548,152.55 |
| 89% | $398,491.71 | -$555,411.52 |
| 90% | $394,507.93 | -$562,520.80 |
| 91% | $390,598.07 | -$569,484.66 |
| 92% | $386,760.18 | -$576,307.20 |
| 93% | $382,992.42 | -$582,992.42 |
| 94% | $379,292.99 | -$589,544.15 |
| 95% | $375,660.14 | -$595,966.10 |
| 96% | $372,092.19 | -$602,261.83 |
| 97% | $368,587.51 | -$608,434.80 |
| 98% | $365,144.51 | -$614,488.36 |
| 99% | $361,761.67 | -$620,425.72 |
| 100% | $358,437.50 | -$626,250.00 |
Conclusion:
Till 13% interest rate, Combined stores are beneficial
From 13% to 100%, South end store is profitable.
To determine
ii.
Rate of return if North-end store is open.
Expert Solution
Answer to Problem 9P
Rate of return is 13.28%.
Explanation of Solution
Given:
Annual Profit = $370000
Leasing Period = 5 years
Expenditure on store fixtures = $1200000.
Combined Profit = $560000.
Calculation:
Return from North End − Here, we need to calculate the
Formula for IRR: 0 = -Initial Investment + [(Cash Inflow1)/(1+IRR)1] + [(Cash Inflow2)/(1+IRR)2] +
[(Cash Inflow3)/(1+IRR)3].....+ [(Cash Inflown)/(1+IRR)n]
Cash flow from North End from Year 1 to 4 =
Cash flow from North End in Year 5 =
Initial Investment = $1,200,000
IRR:
Conclusion:
IRR = 13.28%.
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Chapter 8 Solutions
ENGINEERING ECO ANALYSIS W/STUDY GUIDE
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