# Explain why the internal rate of return can lead to incorrect decisions…

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EMSE6410 Mid Term Part 2 Name ________________________________ Question 1 & 2, – 15 points 1) You have two Mutually Exclusive alternatives to choose from. One requires an investment today of $80,000 and produces the cash flows below. The other requires no investment today but $80,000 in year 2 with its cash flows. Which project should be chosen? MARR 10% Year Alt 1 Alt 2 0 $ (80,000) 1 $ 20,000 2 $ 21,000 $ (80,000) 3 $ 22,000 $ 32,000 4 $ 24,000 $ 33,000 5 $ 26,000 $ 34,000 2) You are going to buy a piece of heavy equipment. You have two companies to choose from A and , B. They each have different lives. Compare the 2 mutually exclusive projects using co termination. MARR 10% Capital Investment $ (26,200) $ (17,000) Cash Flows Year 1 $ 6,000 $ 5,800 Year 2 $ 7,000 $ 6,200 Year 3 $ 8,000 $ 6,500 Year 4 $ 9,000 $ 7,000 Year 5 $ 9,000 $ 8,000 Year 6 $ 9,000 Year 7 $ 9,000 Year 8 $ 9,000 Year 9 $ 9,000 Year 10 $ 10,000 SV (EOL) $ 5,000 $ 3,500

EMSE6410 Mid Term Part 2 Name ________________________________ Question 3 & 4 – 10 Points each 3) Explain why the internal rate of return can lead to incorrect decisions when selecting between two mutually exclusive projects. Make up your own data and build a crossover chart in your example. 4) A) The Board of Directors is considering the three proposals whose cash flows are shown in the table below. Which proposal(s) if any are acceptable if the Board of Directors has set a target MARR of 15%. Use NPV to make the decision. Use either Excel or the tables. End of Year Proposal A Proposal B Proposal C 0 ($50,000) ($75,000) ($100,000) 1 $18,000 $30,000 $33,000 2 $17,000 $27,000 $35,000 3 $15,000 $26,000 $37,500 4 $16,000 $24,000 $40,000 B) Calculate the IRR of all acceptable projects using interpolation. (Use the formula from the in class problems) Show you calculations to both parts

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