Question

The PW of five independent projects have been calculated at an MARR of 12% per year. Select the best combination at a capital investment limit of (a) $25,000, (b) $49,000, and (c) unlimited.
Initial Life,
Project Investment, Years PW,
S -15,000 6 8,540
A - 26,000 8 12,100
M -10,000 6 3,000
E 25,000 4 10
H -40,000 12 15350

Answer 1

Answer:

Project            Investment         Years            PW,

S                        -15,000               6              8,540

A                        - 26,000             8             12,100

M                        -10,000              6              3,000

E                        25,000               4                    10

H                        -40,000            12             15350

I assume that the present worth of the projects is their net present value (NPV), so all the projects have a positive NPV. I believe that there is a mistake on project E since the initial outlay is generally negative, no one will pay you to start a project, although it is also the project with the lowest NPV.

a) If I had $25,000, I would invest in projects S and M which will increase my present wealth by $3,000 + $8,540 = $11,540. If something really strange happened and you would actually receive money for starting a project (project E), I would also take it even if its NPV is only $10, since I'm not spending money, instead I'm receiving money.

b) If I had $49,000, I would invest in projects S and A which will increase my present wealth by $8,540 + $12,100 = $20,640. Again, if something really strange happened and you would actually receive money for starting a project (project E), I would also take it.

c) If I had unlimited resources, I would invest in all the projects since they all have positive NPVs.