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Warm-up problem

Warm-up problem. Suppose you were offered a loan. What would make you more inclined to accept it? a decrease in the loan’s interest rate? a decrease in your MARR? Why does the IRR of the following cash-flow not exist? Pay $250 now and pay $100 in two years. From last time….

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Warm-up problem

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  1. Warm-up problem • Suppose you were offered a loan. What would make you more inclined to accept it? • a decrease in the loan’s interest rate? • a decrease in your MARR? • Why does the IRR of the following cash-flow not exist? • Pay $250 now and pay $100 in two years

  2. From last time… • Investment project cashflows • first negative then positive and NPV(d) is … … decreasing • NPV(d) increasing for loans • IRR • Don’t need MARR. • Can be used in capital budgeting to set MARR. • Problematic when cashflows switch signs more than once (or never)

  3. Aqueduct (Newnan et al 5-2) 50 year analysis period, maintenance costs negligible • 1-stage construction: costs $400m now • 2 stage construction: • costs $300m now and $350m in 25 years • Benefits same in both alternatives • Look only at costs in NPV • Do nothing is not an option • NPV > 0 is the wrong criteria • Choose biggest NPV (as usual)

  4. Warehouse Example The volume of goods being shipped from our warehouse has increased dramatically due a large new contract to supply a major customer. We consider the following 3 alternatives for moving goods to the truck-loading bays: • Status quo: continue to rely on workers manually loading, moving, unloading trolleys. Cost $80k/yr • Buy a forklift for $20k. This will reduce costs to $40k/yr. It will last 7 years. • Install a materials handling system for $200k. It will last 10 years and reduce costs to $5k/yr. Discount rate is 10%.

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