Sensitivity to the Economic Environment

Question

Answer 1

1. Spreadsheet analysis used for changes in MARR. PW is not very sensitive; plan A is

selected for all three MARR values.



2. Sensitivity to changes in life is performed by hand. Not very sensitive; plan A has the best

PW for all life estimates.

Expanding economy



nA = 40(0.80) = 32 years

n1 = 40(0.80) = 32 years

n2 = 20(0.80) = 16 years



PWA = –10,000 + 1000(P/F,10%,32) – 500(P/A,10%,32)

= –10,000 + 1,000(0.0474) – 500(9.5264)

= $–14,716



PWB = –30,000 + 5000(P/F,10%,32) – 100(P/A,10%,32) – 5000

–200(P/F,10%,16) – 5000(P/F,10%,16) – 200(P/F,10%,32)

–200(P/A,10%,32)

= –35,000 + 4800(P/F,10%,32) – 300(P/A,10%,32) – 5200(P/F,10%,16)

= –35,000 + 4800(0.0474) – 300(9.5264) – 5200(0.2176)

= $–38,762



Expected economy



PWA = –10,000 + 1000(P/F,10%,40) – 500(P/A,10%,40)

= –10,000 + 1000(0.0221) – 500(9.7791)

= $-14,867



PWB = –30,000 + 5000(P/F,10%,40) – 100(P/A,10%,40) – 5000

– 200(P/F,10%,20) – 5000(P/F,10%,20) – 200(P/F,10%,40)

– 200(P/A,10%,40)

= –35,000 + 4800(P/F,10%,40) – 300(P/A,10%,40) – 5200(P/F,10%,20)

= –35,000 + 4800(0.0221) – 300(9.7791) – 5200(0.1486)

= $-38,600



Receding economy



nA = 40(1.10) = 44 years

n1 = 40(1.10) = 44 years

n2 = 20(1.10) = 22 years



PWA = –10,000 + 1000(P/F,10%,44) – 500(P/A,10%,44)

= –10,000 + 1000(0.0154) – 500(9.8461)

= $-14,908



PWB = –30,000 + 5000(P/F,10%,44) – 100(P/A,10%,44) – 5000

– 200(P/F,10%,22) – 5000(P/F,10%,22) – 200(P/F,10%,44)

– 200(P/F,10%,44)

= –35,000 + 4800(P/F,10%,44) – 300(P/A,10%,44) – 5200(P/F,10%,22)

= –35,000 + 4800(0.0154) – 300(9.8461) – 5200(0.1228)

= $–38,519



3. Use Goal Seek to find breakeven values of PA for the three MARR values of 4%, 7%, and

10% per year. For MARR = 4%, the Goal Seek screen is below. Breakeven values are:



The PA breakeven value is not sensitive, but all three outcomes are over 3X the $10,000 estimated first cost for plan A.