Compound Interest Factors and  Undefined Interest Rate

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As  the  General  Manager  of  a  Manufacturing  Company  you  are  considering  to  add  a  new  line   of  products  which  you  anticipate  will  capture  a  market  share  for  the  next  20  years.  You   consider two potential options:

Option A         Option B

Investment         900,000       600,000

Annual Benefits       150,000       150,000

Annual O&M         35,000         40,000

Salvage Value         100,000       90,000

Line  useful  Life  (yr)       20         10

Project life  horizon  (yr)     20         20


  1. Write  the  equations  for  NPW  (A)  and  NPW  (B)  using  Compound  Interest  Factors  and   undefined  interest  rate  i
  2. Find  the  interest  rates  which  will  make  NPW  (A)  and  NPW  (B)  equal  to  0  (show  how   you  do  it)


  1. Using  Incremental  Analysis  find  the  interest  rate  which  will  make     NPW  (A)  =  NPW  (B)    (show  how  you  do  it)
  2. Assume  now  that  you  know  the  Cost  of  Capital  for  your  Company  is  6%,  and  you  want   to  maximize  the  investment’s  NPW,  which  option  would  you  choose?  (Show how you   choose)
  3. If  you  know  that  the  Cost  of  Capital  for  your  Enterprise  is  6%,  and  you  want  an  ROI  of   at  least  20%,  would  invest  in  Option  A,  Option  B,  or  renounce  to  invest?  (Show how   you choose)

Last Updated on December 17, 2020 by Essay Pro