homework #6A

HOMEWORK # 6

Answer the following questions using your own words (no numerical calculations are required, only detailed description of analysis procedures) . Be clear, precise, and comprehensive, in other words show that you indeed understand the procedures . Refer to Excel functions (and required input data) as needed.

QUESTION 1 – Given a generic investment with a life horizon of n periods, an initial outflow sum P, a flow of cash at each end-period composed of various Benefits and Costs, and a final inflow sum F, discuss step-by-step the following:

A. How to derive the Cash Flow distribution over the entire life horizon

B. How to derive the NPW distribution as a function of cost of capital i

C. How and why the NPW varies as i increases

D. The meaning of IRR for the investment

E. How to derive the ROI distribution as a function of cost of capital i

QUESTION 2 – Having to select investing into one of two different opportunities, both with the same life horizons n, but having different initial outflow sum P, different flow of cash at each end-period composed of various Benefits and Costs, and different final inflow sum F, describe step-by-step the procedure for precisely (not approximately) identifying the cost of capital i for which the NPW of the two opportunities are equal

QUESTION 3 – Given two opportunities (A & B) to invest in a Project expected to have an indefinite life, attracting a cost of capital i, and requiring different initial investments PA ≠ PB , as well as periodic upgrades costing CA ≠ CB (constant over time) every nA ≠ nB periods, describe how you would proceed to decide which one to implement

QUESTION 4 - Describe the meaning of:

(P/A, i, n) (A/F, i, n)

(P/F, i, n) (P/G, i, n)

(A/P, i, n) (F/G, i, n)