Questions

Submitted by sryerram on Wed, 01/04/2012 - 09:13

Can anyone please answer this question with the explanation


1. Based on the information provided below, which project would you recommend for being pursued?


Project I, with BCR (Benefit Cost ratio) of 1:1.6;
Project II, with NPV of US $ 500,000;
Project III, with IRR (Internal rate of return) of 15%
Project IV, with opportunity cost of US $ 500,000


 



2. Project A has an IRR of 12% and an NPV of $100,000 for a 2 year


duration. Project B has an IRR of 16% and an NPV of $118,000 for a 4 year


duration. What is the opportunity cost, if you select project A instead of project B?


A.) -100,000


B.) 118,000


C.) 100,000


D.) 109,000


 



 

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Samir

Sun, 03/25/2012 - 16:47

What are the answers?


 

krantikumar50

Sun, 03/25/2012 - 17:56

The answers as per me Samir are:


 


1. A, and


 


2. B


 


Hope some experts would testify more on this.


 


Thanks,


KK...

vikasmisra

Sun, 03/25/2012 - 18:11

Shouldnt it be Project III as it gives you sort of an idea that if I invest $100 I will get $115 back.

Option 1 is actually less return Investment 116 return 100

Option 4 is not enough information to make a decision.

Option 2 may be correct, but it doesnt say NPV is against wht kind of investment but it does not tell me against how much investment.

 

Any suggestions.....

V

krantikumar50

Sun, 03/25/2012 - 18:25

And V, it is only 15%, where as for Project 1 it says 1:1.6 which is more, where as in Project 3 one one knows how much is the investment and upto what level. SO, in all probability I feel I would go for Project 1. However, the gentleman who raised would answer after seeing the question from wherever he picked it from.


 


Thanks,


Kranti

Pat13

Mon, 03/26/2012 - 09:19

Hi,

Project 1 is not correct, because a Benefit/Cost Ratio should be always > 1; as it is 1:1,6 it is < 1: 

the costs are 60% higher than the benefits.

Project 4 is eliminated as well, because opportunity costs are defined as the lost profit of the next best alternative. It only says what you do not gain, but not what you gain. But it explains that Answer B ($ 118,000) for Question No. 2 is correct.

So we have to decide between an NPV of $ 500,000 (which means we have a profit of half a million dollars, when we subtract the investment from the sum of the discounted future benefits) or an IRR of 15%. As we do not know the investment, I would definitely go for the NPV.

Regards,

Pat

 

krantikumar50

Mon, 03/26/2012 - 13:45

Pat,

Does not 1:1.6 mean that the company is getting 1.6 return for every 1 expended.

Please guide me Sir. I am at complete loss or may be, if I am incorrect, then I shall re-visit Project Integration Management chapetr again. In case of NPV, it does not say anything more than it and that's why I thought Sir!

Thanks,
KK..

vikasmisra

Mon, 03/26/2012 - 14:10

First of all Project 1 is ruled out bcoz BCR is less than 1. It has to be >1.

Regarding 2 & 3 if I invest 50 billion and the NPV is $500K, it may not be a wise decision, whereas in the case of Project 3 it will give me 4.5 billion. So I would go with Project III.

Cheers

V

krantikumar50

Mon, 03/26/2012 - 15:49

Sir, BCR of 1 : 1.6 means you are getting 1.6 out of every 1 spent. The Answer is A.... That's it.... I don't how did you get this idea Sir that it is less than 1, where as it clearly says 1 : 1.6....

vikasmisra

Mon, 03/26/2012 - 16:35

BCR is business to cost ratio which means


Benefit / Cost. This can be shown as Benefit : cost


In this example it is 1:1.16  that means


Benefit (Profit) = 1


Cost = 1.16


Atleast this is what I understand


Anyone else???


 BTW, what is the answer given in the book / exam set

krantikumar50

Tue, 03/27/2012 - 18:38

What's the answer Samir? You need to come in Sir and lead us all from darkness to light....

negruvoda (not verified)

Fri, 06/29/2012 - 12:04

Is better to learn more than not to learn anything. Think that an education and important information can offer you a better future, a nice career. Ok, maybe you don't have time for school, but I can tell you some good Reasons to study that can determine you to follow a form of education. There's always a solution.