When the country’s economy is expanding, AB In­vestment Company is optimistic and expects a MARR of 15% on new investments. However, in a receding economy the expected return is 8%. Nor­mally a 10% per year return is anticipated. An ex­panding economy causes the estimates of project life to go down about 20%, and a receding econ­omy causes the life values to increase about 10%. Additionally, the market value after the project’s life varies widely; optimistically, it may be as high as 50% more or as low as 75% of the initial investment.

(a) Summarize the optimistic, most likely, and pessimistic estimates in tabular form.

(b) Use a spreadsheet to calculate and plot the sensitivity of PW versus (1) MARR, (2) life values, and (3) market value for possible in­vestment in one of two locations. Use the most likely estimates for the other parame­ters.

(c) Considering all the analyses, under which scenario, if any, should location Miami or Houston be rejected?



All monetary values are in $1000 units.




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