The managers of a company are considering an investment with the following estimated cash flows. MARR is 18% per year. The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ± 4%. Annual expenses are known to be within ±12%. The annual revenue, market value, and useful life estimates are known to be within ±20%. a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management. b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest need). Click the icon to view the interest and annuity table for discrete compounding when the MARR is 18% per year. a. Calculate the PW value for the initial amounts. PW(18%) = (Round to the nearest hundreds.) Capital investment $28,000 Annual revenues $19,000 Annual expenses $5,500 $500 Market value Useful life 15 years
The managers of a company are considering an investment with the following estimated cash flows. MARR is 18% per year. The company is inclined to make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment is known to be within ± 4%. Annual expenses are known to be within ±12%. The annual revenue, market value, and useful life estimates are known to be within ±20%. a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they should proceed with this project. Graph your results for presentation to management. b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them in accordance with the need for more accurate estimates (from highest need to lowest need). Click the icon to view the interest and annuity table for discrete compounding when the MARR is 18% per year. a. Calculate the PW value for the initial amounts. PW(18%) = (Round to the nearest hundreds.) Capital investment $28,000 Annual revenues $19,000 Annual expenses $5,500 $500 Market value Useful life 15 years
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The managers of a company are considering an investment with the following estimated cash flows. MARR is 18% per year. The company is inclined to
make the investment; however, the managers are nervous because all of the cash flows and the useful life are approximate values. The capital investment
is known to be within ± 4%. Annual expenses are known to be within ±12%. The annual revenue, market value, and useful life estimates are known to be
within ±20%.
a. Analyze the sensitivity of PW to changes in each estimate individually. Based on your results, make a recommendation regarding whether or not they
should proceed with this project. Graph your results for presentation to management.
b. The company can perform market research and/or collect more data to improve the accuracy of these estimates. Rank these variables by ordering them
in accordance with the need for more accurate estimates (from highest need to lowest need).
Click the icon to view the interest and annuity table for discrete compounding when the MARR is 18% per year.
a. Calculate the PW value for the initial amounts.
PW(18%) =
(Round to the nearest hundreds.)
C₂₂
Capital investment $28,000
Annual revenues $19,000
Annual expenses
$5,500
Market value $500
Useful life 15 years
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