15-6 The IRR for each project is calculated using the Excel function = RATE life, annual benefit, -first cost, salvage value, and then the table is sorted with IRR as the key.. The oppor
Trang 1Chapter 15: Selection of a Minimum Attractive Rate of Return 15-1
The interest rates on these securities vary greatly over time, making it impossible to predict rates Three factors that distinguish the securities:
Bond Duration Bond Safety
Corporate Bond 20 years Less Safe
The importance of the non-taxable income feature usually makes the municipal bond the one with the lowest interest rate The corporate bond generally will have the highest interest rate
15-2
As this is a situation of “neither input nor output fixed,” incremental analysis is required
Using the incremental rates of return one may determine the preferred alternative at any interest rate
For interest rates between:
The problem here concerns Alternative C C is preferred for 4.5% < Interest Rate < 9.6%
15-3
Lease: Pay $267 per month for 24 months
Purchase:
A = $9,400 (A/P, 1%, 24) = $9,400 (0.0471) = $442.74
Salvage (resale) value = $4,700
(a) Purchase Rather than Lease
∆Monthly payment = $442.71 - $267 = $175.74
∆Salvage value = $4,700 - $0 = $4,700
∆ Rate of Return
B C D A
Trang 2PW of Cost = PW of Benefit
$175.74 (P/A, i%, 24) = $4,700 (P/A, i%, 24) = $4,700/$175.74 = 26.74
i = 0.93% per month Thus, the additional monthly payment of $175.74 would yield an 11.2% rate of return Leasing is therefore preferred at all interest rates above 11.2%
(b) Items that might make leasing more desirable:
1 One does not have, or does not want to spend, the additional $175.74 per month
2 One can make more than 11.2% rate of return in other investment
3 One does not have to be concerned about the resale value of the car at the end of two years
15-4
Investment opportunities may include:
1 Deposit of the money in a Bank
2 Purchase of common stock, US Treasury bonds, or corporate
bonds
3 Investment in a new business, or an existing business
4 (and so on.)
Assuming the student has a single investment in which more than $2,000 could be invested, the MARR equals the projected rate of return for the investment
15-5
Venture capital syndicates typically invest money in situations with a substantial amount of risk The process of identifying and selecting investments is a time-consuming (and hence costly) process The group would therefore only make a venture capital investment where (they think) the rate of return will be high- probably 25% or more
15-6
The IRR for each project is calculated using the Excel function = RATE (life, annual benefit, -first cost, salvage value), and then the table is sorted with IRR as the key Projects A and B are the top two projects, which fully utilize the $100,000 capital budget The opportunity cost
of capital is 12.0% if based on the first project rejected
Project IRR First Cost Annual
Benefits
Value
Trang 3The IRR for each project is calculated using the Excel function = RATE (3, annual benefit, -first cost) since N = 3 for all projects Then the table is sorted with IRR as the key Do projects 3, 1 and 7 with a budget of $70,000 The opportunity cost of capital is 26.0% if based on the first project rejected
Project IRR Cumulative
First Cost
First Cost Annual
Benefit
15-8
The IRR for each project is calculated using the Excel function = RATE (life, annual benefit, -first cost, salvage value), and then the table is sorted with IRR as the key With a budget of
$500,000, the opportunity cost of capital is 19.36% if based on the first project rejected
Projects 3, 1, 4, and 6 should be done
Project IRR Cumulative
First Cost
First Cost Annual
Benefit
Life (years)
15-9
The IRR for each project is calculated using the Excel function = Rate (life, annual benefit, -first cost), and then the table is sorted with IRR as the key The top 6 projects required
$260K in capital funding, and the opportunity cost of capital based on the first rejected project is 8.0%
Project IRR Cumulative
First Cost
First Cost Annual
Benefit
Life (years)
Trang 4D 8.00% $285,000 $25,000 $6,261 5
15-10
The IRR for each project is calculated using the Excel function = RATE (life, annual benefit, -first cost, salvage value), and then the table is sorted with IRR as the key With a budget of
$100,000, the top 5 projects should be done (6, 5, 4, 1, and 7) The opportunity cost of capital based on the first rejected project is 16.41%
Project IRR First Cost Annual
Benefits
Life (years) Salvage
Value