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Week 5 Problem 15

The document presents cost-benefit analyses of two competing projects (A and B) using net present value and payback methods. It lists the initial costs, recurring costs, and probabilities of those costs occurring. It notes that if the probability estimates are incorrect, the predictions will not be accurate even with a more accurate probability estimate. It asks to recalculate the net present value and payback period for each project based on the given data and probabilities. It finally asks which evaluation method provides the best information and why.

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Rachelle Rodriguez
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392 views2 pages

Week 5 Problem 15

The document presents cost-benefit analyses of two competing projects (A and B) using net present value and payback methods. It lists the initial costs, recurring costs, and probabilities of those costs occurring. It notes that if the probability estimates are incorrect, the predictions will not be accurate even with a more accurate probability estimate. It asks to recalculate the net present value and payback period for each project based on the given data and probabilities. It finally asks which evaluation method provides the best information and why.

Uploaded by

Rachelle Rodriguez
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
Download as docx, pdf, or txt
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Week 5 problem 15

Problem 15 (page 220)

CostBenefit Analysis Listed in the diagram for Problem 15 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. Explain what happens to the answer if the probabilities of the recurring costs are incorrect and a more accurate estimate is as follows: NPV= cash flow/ (1 + discount) * time A .10 .55 .35 $75,000 95,000 105,000 NPV 68,182 61,290 77,778 .4 .4 .2 B $85,000 100,000 110,000 NPV 60,714 71,429 91,667

If the probabilities are incorrect then the predictions wont be accurate even after an accurate estimate is made.

b. Repeat step (a) for the payback method. PBM= initial investment/ annual payback A .10 .55 $75,000 95,000 PBM ? ? .4 .4 PBM ? ? B 60,714 71,429

.35

105,000

.2

91,667

b. Which method do you think provides the best source of information? Why?

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