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

Topics: Capital accumulation, Value added, Investment / Pages: 3 (574 words) / Published: Mar 27th, 2011
1. Plan X Year CF PVIF12%,n PV 1 470,000 0.893 419,710 2 610,000 0.797 486,170 3 950,000 0.712 676,400 4 970,000 0.636 616,920 5 1,500,000 0.567 850,500 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 Year CF PVIF12%,n PV 1 380,000 0.893 339,340 2 700,000 0.797 557,900 3 800,000 0.712 569,600 4 600,000 0.636 381,600 5 1,200,000 0.567 680,400 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 Year CF PVIF13%,n PV 1 470,000 0.885 415,950 2 610,000 0.783 477,630 3 950,000 0.693 658,350 4 970,000 0.613 594,610 5 1,500,000 0.543 814,500 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 Year CF PVIF15%,n PV 1 380,000 0.870 330,600 2 700,000 0.756 529,200 3 800,000 0.658 526,400 4 600,000 0.572 343,200 5 1,200,000 0.497 596,400 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
IRR Certainty
Equivalents
RADRs
X 2 2 1 1
Y 1 1 2 2

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 adjusted

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