Problems 533
maximized. We know that MARR must be adjusted from time to time to reasonablybalance
the cO,stof the projects that meet the MARR criterion and the available supply of money.
This adjustment of the MARR to equal the cutoff rate of return is essential for the rate of
return and present worth methods to yield compatible results.
Another way of ranking is by incremental rate of return analysis. Once a ranking has
been made, we can go down the list and accept the projects until the money runs out. There
is a theoretical difficulty if the capital budget contains more money than is required forn
projects, but not enough for one more(n+ 1 projects). As a practical matter, capital budgets
are seldom inflexible, with the result that some additional money may be allocated if the
(n+ l)st project looks like it should be included.
~OBLEMS
Ear1..of the following 10 independent projects has a
10.,) ~ar life and no salvage value.
Project
1 2 3 4 5 6 7 8 9
10
Cost
(thousands)
$ 5
15
10
30
5
20
5
20
5
10
Uniform
Annual
Benefits
(thousands)
$1.03
3.22
1.77
4.88
1.19
3.83
1.00
3.69
1.15
2.23
Computed
Rate of
Return
16%
17
12
10
20
14
15
13
19
18
(a)Use rate of return methods to determine which set
of projects should be uQdertaken if the MARR is
10%.
(b) Use rate of return methods to determine which
set of projects should,be undertaken if the capital
budget is limited to $100,000.
(c) For a budget of $100,000, what interest rate
should be used in rationing capital by present
worth methods? (Limit your answer to a value for
which there is a compound interest table available
in the appendix).
(d)Using the interest rate determined in part(c),rank
order the eight different investment opportunities
by means of the present worth method.
(e) For a budget of $100,000 and the ranking in part
(d),which of the investment opportunities should
be selected?
The projects have been proposed by the staff of the
Ace Card Company. The MARR of Ace has been 12%
for several years.
(a)If there is ample money available, what projects
should Ace approve?
(b)Rank order all the acceptable projects in their
order of desirability.
(c)If only $55,000 is available, which projects
should be approved?
At Miami Products, four project proposals (three with
mutually exclusive alternatives) are being considered.
All the alternatives have a lO-year useful life and no
salvage value.
-- -- - - -- - -
Uniform
Annual Computed
Project Cost Benefits Rate of
Proposal (thousands) (thousands) Return
Project 1
Alt.A $25 $4.61 13%
Alt.B 50 9.96 15
Alt. C 10 2.39^20
Project 2
Alt.A 20 4.14^16
Alt.B 35 6.71 14
Project 3
Alt.A 25 5.56 18
Alt.B 10 2.15 17
Project 4^10 1.70^11
