A company has been invited to invest $1 million in a partnership and receive a guaranteed total of $2.5 million after 4 years. By corporate policy, the MARR is always established at 4% above the real cost of capital. The real interest rate paid on capital is currently 10% per year and the inflation rate during the 4-year period is expected to average 3% per year. (a) Is the investment economically justified? (b) At what real interest rate on capital will the decision made above change?
What will be an ideal response?
(a) Required future amount is equal to a return of if on its investment
if = (0.10 + 0.04) + 0.03 + (0.1 + 0.04)(0.03) = 0.1742 (17.42%)
Required future: F = 1,000,000(F/P,17.42%,4)
= 1,000,000(1.90094)
= $1,900,940
Company will get more; make the investment
(b) Set F relation equal to $2.5 million; find if; calculate MARR and then i
2,500,000 = 1,000,000(F/P,if,4)
= 1,000,000(1 + if)?
(1 + if) = 2.5^0.25
if = 1.2574 – 1
= 0.2574 (25.74%)
0.2574 = MARR + 0.03 + (MARR)(0.03)
MARR = 0.2574 – 0.03)/1.03
= 0.2208
i = MARR – 0.04
= 0.2208 – 0.04
= 0.18.08 (18.08%)
If the real interest rate i paid on capital exceeds 18.08% per year, the investment is not economically justified.
You might also like to view...
What four types of equipment are used to create heat for laboratory experiments?
What will be an ideal response?
The capacity of a capacitor can be tested:
A) By checking the residual current draw of the capacitor with the capacitor removed from the unit. B) By measuring the voltage across the capacitor after deenergizing the motor circuit. C) By measuring the resistance of the capacitor. D) Using a capacitor analyzer.
The edge shown above is known as a ______ cut
a) dado
b) bevel
c) mortise
d) chamfer
Many commercial and industrial complexes use a(n) ____________________ to heat water that is supplied to heat transfer devices that condition the air in a structure or zone.
Fill in the blank(s) with the appropriate word(s).