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QUESTION

# Explain feasibility analysis. What is the NPV? . . . the B/C? . . . the IRR? What is the criterion for project acceptability for the NPV? . . . for the B/C? . . . for the IRR? How is the IRR of a proj

Explain feasibility analysis.

What is the NPV? . . . the B/C? . . . the IRR?

What is the criterion for project acceptability for the NPV? . . . for the B/C? . . . for the IRR?

How is the IRR of a project generally calculated?

Why is the IRR generally not a good way to evaluate investment alternatives?

Consider the following investment. You invest \$500 per acre to establish a stand of trees. At the end of each year for 30 years, you incur an annual management expense of \$10. At the end of 30 years, you receive \$5,000 per acre in stumpage fees.

Calculate the NPV and B/C ratio for this investment.

Calculate the internal rate of return on this investment to the nearest tenth of a percent.

Given below are the after-tax incremental cash flows for Projects A and B. Note the similarity between the two projects.

End of Year

Projects

0

1

2

3

4

5

Project A

-10,000

-50000

60,000

20,000

30,000

15,000

Project B

-10,000

50,000

-60,000

40,000

30,000

20,000

Calculate the NPV at 20% for each project.

Calculate the IRR(s) for the two projects.

If you had to invest in one of the projects, which project would you prefer and why?

The Rover 6 is a new custom-designed sports car. An analysis of the task of building the Rover 6 reveals the following list of relevant activities, their immediate predecessors, and their duration.

Letter

Normal

Description

Immediate

Predecessor(S)

Time (Days)

B

Design

A

8

C

Order special accessories

B

1

D

Build frame

B

1

E

Build doors

B

1

F

Attach axles, wheels, gas tank

D

1

G

Build body shell

B

2

H

Build transmission & drivetrain

B

3

I

Fit doors to bodyshell

G, E

1

J

Build engine

B

4

K

Bench-test engine

J

2

L

Assemble chassis

L

1

N

Paint body

I

2

O

Install wiring

N

1

P

Install interior

N

2

Q

Accept delivery of special accessories

C

5

R

Mount body and accessories on the chassis

M, O, N, Q

1

S

R

1

T

Attach exterior trim

S

1