econ

When evaluating two alternatives by the rate of return method, if alternative A has a rate of return of 10% and alternative B has a rate of return of 18%, what is known about the rate of return on the increment between A and B if the investment required in B is (a) larger than that required for A, and (b) smaller than that required for A?

(a) The rate of return on the increment has to be larger than 18%. (b) The rate of return on the increment has to be smaller than 10%.

According to Descartes' rule of signs, how many possible i* values are there for net cash flow series that have the following signs: a. −+++−+++−b. −−++ c. +−−−−−−+−+−−− d. −−−−+++−−−−−+

(a) four; (b) one; (c) five; (d) three

What does a rate of return of −100% mean?

A rate of return of −100% means that the entire investment is lost.

If during an ROR evaluation of two mutually exclusive alternatives, multiple i* values are indicated by the rule of signs and the determination of the exact ROR value is not necessary, a way to avoid extra ROR computations is to use the MARR and calculate the:

Any of these: PW, AW, FW

State a fundamental reason why the internal rate of return (IRR) and the external rate of return (ERR) will have different values when the cash flow series is nonconventional and multiple i* values are indicated.

In the case of the IRR, all excess funds are assumed to be retained within the project and earn at any one of the multiple i* value. For the ERR, the external rates for reinvestment of excess funds and borrowing in negative net cash flow years will alter the i* value, except when the reinvestment rate is exactly equal to the i* value

What is the difference in cash flows between revenue and cost alternatives?

Revenue alternatives have revenue, cost, and possibly savings cash flow estimates. Cost alternatives assume the revenue is the same for all alternatives; therefore, they have only cost cash flows. A cost alternative can have a savings cash flow estimate.

Explain why it is not a good practice to set the reinvestment rate on excess funds and the borrowing rate for negative NCF years equal to each other when the external rate of return (ERR) is to be determined.

Setting the reinvestment and borrowing rates equal to each other implies that no profit margin is anticipated over time. A company cannot continue in business in such circumstances.

You are conducting an evaluation of three mutually exclusive alternatives for a long-term manufacturing process. What time period is required for conducting a present worth analysis if the estimated lives are 3, 4, and 6 years, respectively?

The analysis must be conducted for the least common multiple of years, which is 12

State two conditions under which the do-nothing alternative is not an option.

The do-nothing alternative is not an option (1) when it is absolutely required that one of the defined alternatives be selected (e.g., legal purposes), and (2) when each alternative has only cost cash flow estimates.

What is meant by do-nothing alternative?

The do-nothing alternative means that the status-quo should be maintained, that is, if none of the alternatives under consideration are economically attractive, all of them should be rejected.

What is the major advantage that the annual worth method has over the present worth method?

The equal service requirement is met without using the least common multiple (LCM) of alternative lives.

Assume that an alternative has a 3-year life and that you calculated its annual worth over its 3-year life cycle. If you were told to provide the annual worth of that alternative for a 4-year study period, would the annual worth value you calculated from the alternative's 3-year life cycle be a valid estimate of the annual worth over the 4- year study period? Why or why not?

The estimate obtained from the three-year AW would not be valid, because the AW calculated over one life cycle is valid only for the entire cycle, not part of the cycle. Here the asset would be used for only a part of its second 3-year life cycle.

What is the main difference between mutually exclusive and independent alternatives?

When evaluating mutually exclusive alternatives, only one can be accepted. On the other hand, when evaluating independent alternatives, more than one can be accepted, subject to budget limitations.

Assuming there are two i* values determined when an ROR analysis of a nonconventional cash flow series is performed, one guideline for retaining and discarding i* values is:

b. Retain the i* > 0, if one is positive and one is negative

According to Descartes' rule of signs, the possible number of i* values for the following net cash flow series is: ++ ++−−−−−−+−+−−−++

c. 6

When using the modified ROR method to remove multiple ROR values, an additional estimate needed besides the cash flows and their timings is the:

c. reinvestment rate