Evaluating Cherone Equipment's Risky Plans for Increasing Its Production Capacity

1.
Plan X
YearCFPVIF12%,nPV

1 470,0000.893 419,710
2610,0000.797486,170
3950,0000.712676,400
4970,0000.636616,920
51,500,0000.567850,500
3,049,700

NPV=CF1/(1+k)1 + CF2/(1+k)2 + CF3/(1+k)3 + CF4/(1+k)4 + CF5/(1+k)5 – CF0
Calculator solution = 349,700
NPV = 3,049,700 - 2,700,000
NPV= 349,700
IRRX = 16.22%

Plan Y
YearCFPVIF12%,nPV

1 380,0000.893 339,340
2700,0000.797557,900
3800,0000.712569,600
4600,0000.636381,600
51,200,0000.567680,400
2,528,840

NPV= CF1/(1+k)1 + CF2/(1+k)2 + CF3/(1+k)3 + CF4/(1+k)4 + CF5/(1+k)5 – CF0
Calculator solution = 428,968.70
NPV= 2,528,840 - 2,100,000
NPV= 428,840
IRRY = 18.82%

Both NPV and IRR are better for Project Y. The NPV and IRR are higher.

2.
Plan X
YearCFPVIF13%,nPV

1 470,0000.885 415,950
2610,0000.783477,630
3950,0000.693658,350
4970,0000.613594,610
51,500,0000.543814,500
2,961,040

NPV= CF1/(1+k)1 + CF2/(1+k)2 + CF3/(1+k)3 + CF4/(1+k)4 + CF5/(1+k)5 – CF0
Calculator solution = 261,040
NPV= 2,961,040 - $2,700,000
NPV= 261,040

Plan Y
YearCFPVIF15%,nPV

1380,0000.870330,600
2700,0000.756529,200
3800,0000.658526,400
4600,0000.572343,200
51,200,0000.497596,400
2,325,800

NPV= CF1/(1+k)1 + CF2/(1+k)2 + CF3/(1+k)3 + CF4/(1+k)4 + CF5/(1+k)5 – CF0
Calculator solution = 225,412.37
NPV=2,325,800 - $2,100,000
NPV=225,800

The equivalent NPV and RADR NPV are better selection for Project X. The equivalent NPV and the RADR NPV are higher.

3.
Ranking

Plan
NPV
IRRCertainty
Equivalents
RADRs
X2211
Y1122

Both NPV and IRR have the same rankings. At the same time, making risk adjustments through either certainty equivalents or RADRs resulted in reversing the ranking from the non-risk...