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ASSIGNMENT
Group Members
Lecturer
Date of Submission
:
:
Chong Li Feng
Choo Ee Huey
Choo Tze Chyuan
Goh Aik Wei
Phua Yun Hock
Dr. Maran Marimuthu
23 November 2015
18038
18510
18270
18165
18295
Chemical Engineering
Chemical Engineering
Chemical Engineering
Chemical Engineering
Chemical Engineering
Solution:
Present Worth is used as the measure of worth.
Given interest rate is 11% per year.
Assumption: Use Lowest Common Factor of 12 years.
a) Mathematical Expression:
The cash flow for Proposal 1 is as shown below:
Conclusion:
Proposal 1 is chosen because it has higher present worth (least negative value).
b) Graphical Expression:
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
Start-up Cost
(RM)
-85000
0
0
-85000
0
0
-85000
0
0
-85000
0
0
0
Annual Total
(RM)
0
-85000
-49500
-49500
-49500
-49500
-49500
-134500
-49500
-49500
-49500
-49500
-49500
-134500
-49500
-49500
-49500
-49500
-49500
-134500
-49500
-49500
-49500
-49500
-49500
-49500
PRESENT WORTH AT YEAR 0
Present Worth
(RM)
-85,000.00
-44,594.59
-40,175.31
-98,345.24
-32,607.18
-29,375.84
-71,909.19
-23,842.09
-21,479.36
-52,579.38
-17,433.13
-15,705.52
-14,149.12
-547,195.97
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
Start-up Cost
Annual Maintenance
Replacing Cost
(RM)
Cost (RM)
(RM)
-272000
0
0
0
-272000
0
0
0
-272000
0
0
0
0
Annual
Present
Total
Worth
(RM)
0
0
-272000
-4500
0
-4500
-4500
0
-4500
-4500
-8200
-12700
-4500
0
-276500
-4500
0
-4500
-4500
0
-4500
-4500
-8200
-12700
-4500
0
-276500
-4500
0
-4500
-4500
0
-4500
-4500
-8200
-12700
-4500
0
-4500
PRESENT WORTH AT YEAR 0
(RM)
-272,000.00
-4,054.05
-3,652.30
-9,286.13
-182,139.11
-2,670.53
-2,405.88
-6,117.06
-119,980.68
-1,759.16
-1,584.83
-4,029.50
-1,286.28
-610,965.53
Start-up cost
Replacing Cost
Conclusion:
Proposal 1 is chosen because it has higher present worth (least negative value).
Project P
-50,000
-6,500
27,000
0
7
25.2
Project Q
-105,000
-15,000
45,000
20,000
7
21.3
Solution:
(a) Required rate of return (RROR) is the minimum annual percentage earned by an investment that
will induce individuals or companies to put money into a particular security or project. It is the
minimum acceptable rate of return on an investment proposal that is comparable with the rate of
return obtained effortlessly and at a low level of risk in the financial markets.
The minimum attractive rate of return (MARR) is the minimum rate of return that a company is
willing to accept before starting a project, given its risk and the opportunity cost of forgoing
other projects. Basically, there is no difference between MARR and RROR. Both carry the
similar meaning and have the same function. They are often set to be a benchmark rate or cut-off
rate. An investment is justified economically if it is expected to return at least the MARR or
RROR.
Project P
-50 000
-6 500
27 000
0
7
25.2
Project Q
-105 000
-15 000
45 000
20 000
7
21.3
Project Q-Project P
-55 000
-8 500
18 000
20 000
Trial 1: i = 12%
PW = 55 000 + 9 500(4.564) + 20 000(0.4523) = -2 590
Trial 2: i = 10%
PW = 55 000 + 9 500(4.868) + 20 000(0.5132) = 1 510
Using interpolation:
i* 10
0 1510
12 10 2590 1510
i* 10.74%
Conclusion:
Compared to RROR (12.04%),
Since i* < RROR, Project P is chosen.