Search results “Two mutually exclusive investment projects”

This video explains how to use net present value (NPV) to decide which project to accept in the context of mutually exclusive investment opportunities. A comprehensive example is provided to demonstrate that the project with the highest NPV is selected because it adds the most wealth to the firm.
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Views: 11298
Edspira

Views: 1445
RVS IMSR

Consider the following two mutually exclusive investment projects: Assume that MARR = 15%. Which project would be selected under an infinite planning horizon with project repeatability likely, according to the IRR criterion?

Views: 10
fxgbx fbxf

In this video I’m going to explain how we can evaluate Mutually Exclusive projects. If you are given more than one investment project to evaluate, then you are facing either a Non-Mutually Exclusive or a Mutually Exclusive kind of problem.
In Non-Mutually Exclusive assessments you can chose more than one project. But in Mutually Exclusive assessments we have budget constraint and only one project can be selected to for investment.

Views: 2542
F. Tayari

Due to differences in the scale, timing, and riskiness of projects, we cannot simply compare the IRRs (incremental rates of return) of two projects. However, we can compute the incremental cash flows of choosing one project versus the other and compute an incremental IRR for these cash flows. This incremental IRR can then be compared to the discount rate to determine which project is more profitable. That being said, the incremental IRR is problematic when some of the negative cash flows do not precede the positive cash flows. Furthermore, the incremental IRR tells us which project is more profitable but it does not tell us whether each of the projects has a positive NPV on a stand-alone basis. And, if the projects have different costs of capital, then we have the additional problem of not knowing the cost of capital to which we should be comparing the incremental IRR.
Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com
To like us on Facebook, visit https://www.facebook.com/Edspira
Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com
To follow Michael on Facebook, visit
https://facebook.com/Prof.Michael.McLaughlin
To follow Michael on Twitter, visit
https://twitter.com/Prof_McLaughlin

Views: 59914
Edspira

More videos at http://facpub.stjohns.edu/~moyr/videoonyoutube.htm

Views: 1350
Ronald Moy

An Incremental rate of return analysis between two cash flows, using hand calculations and Excel. This is taught in a engineering economics class.
Here is my book of 55+ Engineering Economics problems http://goo.gl/KKOx0q

Views: 34934
Tall Bridgeguy

Comparison of Two Mutually Exclusive Projects

Views: 1423
WarVIEagle

Math Geek Justin defines "mutually exclusive" and how it pertains to stats. www.mathgeeks-tutoring.com

Views: 13
mathgeekstutoring

Shows the use of NPV and the equivalent annuity cash flow concept (EAC) to compare projects with different life spans

Views: 14030
Codible

Views: 307
Kimberly Reisman

Check out http://www.engineer4free.com for more free engineering tutorials and math lessons!
Engineering Economics Tutorial: Comparing two projects with equal service lives.

Views: 2391
Engineer4Free

Distinguish between independent projects and mutually exclusive projectsb cases of ranking conflict among where the npv irr methods give different results, which project should be chosen? Why? Cdistinguish mu answer to what is difference in capital budgeting? Answer distinguish. Capital budgeting zenwealth businessfinanceonline capitalbudgeting. The projects being analyzed by a abstract. Mutually exclusive projects are a set of from which at most one will be accepted. A decision to undertake one project from mutually exclusive projects excludes all other consideration. Npv and irr are two of the most widely used investment analysis capital budgeting decision in decisions, mutually exclusive projects refer to a sect out which only one project can be selected for. Independent projects are in which the acceptance of one. Conversely, two projects are mutually exclusive if acceptance of one impacts adversely a. In this case, the question is not if equipment should be replaced but apr 21, 2016jan 24, 2017 in capital budgeting analysis of multiple projects. Irr on the other hand is a relative measure i. The finance manager will have to work with these complexities while evaluating and selecting projectsmutually exclusive projects. In mutually exclusive projects, the cash flows of one project can have an impact on another net present value is absolute measure i. Capital projects are often classified as mandatory or discretionary. Thus, all independent projects which meet the capital budgeting critierion should be accepted. With multiple independent projects, the acceptance of vswhen evaluating more than one project at a time, it is important to identify whether projects are or mutually exclusive. Npv and mutually exclusive investments youtube. Independent project is a whose cash flows are not affected by the accept reject decision for other projects. It represents the dollar amount of value added or lost by undertaking a project. Capital budgeting evaluating the desirability of an investmentcapital investmentindependent mutually exclusive projects decision rule independent and. B what is the difference between independent and mutually projects exclusive distinguish mutua projects, project sequencing, capital exclusive, replacement events youtube. For example, the replacement of ageing equipment is a mandatory decision. Mutually exclusive projects if the cash flows of one can be adversely impacted by acceptance other. Html url? Q webcache. An independent project is a whose cash flows are not affected by the accept reject decision for other projects. Unlike independent projects, in which a decision to invest jun 5, 2011 capital budgeting techniques identify whether project is an or mutually exclusive projects if the cash flows of one are unaffected by acceptance other. Please explain the difference between two with reference to project management cash flow analysis for making capital decisions can become more complex because of interaction different projec

Views: 344
Lanora Hurn Tipz

This video is the 3rd part of the series of important questions for Corporate Finance for Dec 2014 exam on Capital Budgeting. It is one of the most important reading of Corporate Finance which is part of curriculum in Level 2 as well. Basic of Level 1 are crucial to be learnt and understood in detail.
This recording is by Ankur Kulshrestha, CFA who is India's leading CFA faculty and has guided more than 2,000 students to success in LI and LII over his teaching career of more than 50 batches over 6 years.

Views: 2863
FinStudyClub

In this video, you will learn how to use the payback period method for comparing two projects.

Views: 10762
maxus knowledge

Incremental Rate of Return-Making a choice table for three Cash flow alternatives in Excel. Chose the best of three cash flow alternatives using a rate of return analysis. I show you how to make rate of return graphs and do an incremental analysis.
Here is my book of 55+ Engineering Economics problems http://goo.gl/KKOx0q

Views: 14725
Tall Bridgeguy

In this video I’m going to explain how we can evaluate Mutually Exclusive projects. If you are given more than one investment project to evaluate, then you are facing either a Non-Mutually Exclusive or a Mutually Exclusive kind of problem.
In Non-Mutually Exclusive assessments you can chose more than one project. But in Mutually Exclusive assessments we have budget constraint and only one project can be selected to for investment.

Views: 820
F. Tayari

Project management topic on Capital budgeting techniques - NPV - Net Present Value, IRR - Internal Rate of Return, Payback Period, Profitability Index or Benefit Cost Ratio.

Views: 436337
pmtycoon

More videos at http://facpub.stjohns.edu/~moyr/videoonyoutube.htm

Views: 6011
Ronald Moy

Download Excel workbook http://people.highline.edu/mgirvin/ExcelIsFun.htm
Learn about : IRR and Mutually Exclusive Projects. Build a table and plot an X-Y Scatter chart to see that at different Required Rates of Return we get different Net Present Value amounts with Mutually Exclusive Projects. Build a table of Difference Cash Flows to then calculate the cross over rate.

Views: 29026
ExcelIsFun

We started today's class by looking at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR. We then compared projects with different lives and considered how best to incorporate side costs and side benefits into investment analysis.
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr16/Session14.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session14test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session14soln.pdf

Views: 2504
Aswath Damodaran

This video discusses how and why the IRR decision rule cannot be trusted when evaluating a project involving a delayed investment. This is because the IRR is only guaranteed to work when all of a project's negative cash flows occur before the project's positive cash flows. A comprehensive example is provided to illustrate how, in the case of a delayed investment (a positive cash flow upfront followed by a stream of negative cash flows), IRR can incorrectly suggest that a project be accepted when the NPV decision rule states that the project be rejected (of course, the reverse is possible as well; IRR can incorrect suggest to reject a project when NPV says to accept).
Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com
To like us on Facebook, visit https://www.facebook.com/Edspira
Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com
To follow Michael on Facebook, visit
https://facebook.com/Prof.Michael.McLaughlin
To follow Michael on Twitter, visit
https://twitter.com/Prof_McLaughlin

Views: 9041
Edspira

We started today's class by looking at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR. We then compared projects with different lives and considered how best to incorporate side costs and side benefits into investment analysis.
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr17/session14.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session14test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session14soln.pdf

Views: 3099
Aswath Damodaran

http://questionssolved.com/the-bartram-pulley-company/
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $5,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:
PROJECT A PROJECT B
Probability Net CashF low Probability Net CashFlow
0.2 $7,000 0.2 $ 0
0.6 6,750 0.6 6,750
0.2 8,000 0.2 18,000
BPC has decided to evaluate the riskier project at a 11% rate and the less risky project at a 10% rate.
What is the expected value of the annual net cash flows from each project? Round your answers to nearest dollar.
Project A Project B
Net cash flow $ $
What is the coefficient of variation (CV)?
σ (to the nearest whole number) CV (to 2 decimal places)
Project A $
Project B $
What is the risk-adjusted NPV of each project? Round your answer to the nearest dollar.
Project A $
Project B $

Views: 316
Robin Anderson

Views: 46
Lori Wood

IRR with Mutually Exclusive Projects http://www.youtube.com/watch?v=y0Vjrr3BebU
Modified IRR http://www.youtube.com/watch?v=fp9_MbUeves

Views: 2505
Ronald Moy

Views: 116
UFWarrington

Views: 303
Kim Gaither

Shows how multiple internal rates of return (IRR) can result when cash flows change sign more than once. When that happens, use Net Present Value (NPV).

Views: 29151
Codible

How to Make Good Decisions (Opportunity Cost Matrix)
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Blockgeeks
https://www.youtube.com/channel/UCd8CDrm6rvwBZc6g7BYAkfQ
What is an 'Opportunity Cost'
Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up.
Read more: Opportunity Cost http://www.investopedia.com/terms/o/opportunitycost.asp#ixzz4lmcMPwVI
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My name is Ameer Rosic, and I'm a serial entrepreneur, investor, Marketing Strategist and Blockchain Evangelist
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Views: 4883
Ameer Rosic

In this video I calculate the crossover rate or the point where the NPVs of two different projects become equal.

Views: 117
Kirby Cundiff

FinTree website link: http://www.fintreeindia.com
FB Page link :http://www.facebook.com/Fin...
This video covers the following key areas:
- Mutually exclusive project with unequal lives, using the least common multiple of lives approach or the equivalent annual annuity approach and
- Capital Rationing
We love what we do, and we make awesome video lectures for CFA and FRM exams. Our Video Lectures are comprehensive, easy to understand and most importantly, fun to study with!
This Video lecture was recorded by our popular trainer for CFA, Mr. Utkarsh Jain, during one of his live CFA Level II Classes in Pune (India).

Views: 3624
FinTree

This video discusses how the IRR decision rule becomes ineffective in evaluating whether to accept a project when the project has more than one IRR. The video provides a comprehensive example of a project that has two different IRRs and explains why in such situations the NPV decision rule must be used instead.
Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com
To like us on Facebook, visit https://www.facebook.com/Edspira
Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com
To follow Michael on Facebook, visit
https://facebook.com/Prof.Michael.McLaughlin
To follow Michael on Twitter, visit
https://twitter.com/Prof_McLaughlin

Views: 16856
Edspira

In this video on NPV vs IRR, we discuss the top differences between the two along with examples and also which tool has more relevance.
What is NPV?
NPV = CF/(1=r)^t - Cash Outflow
NPV is the acronym for Net Present Value, calculated as the present value of cash inflow less present value of cash outflow.
What is IRR?
IRR = CF/(1+IRR)^t = Cash Outflow
IRR is the acronym for Interest Rate of Return, known as discount rate that make NPV of all cash inflows of a project equal to zero.
Differences between NPV vs IRR
----------------------------------------------------
NPV is expressed in the form of currency return which a company expects from the project. Whereas, IRR is expressed in the form of percentage return a firm expects from the project
if you are evaluating two or more mutually exclusive projects so better go for NPV method instead of IRR method. It is safe to depend on NPV method for selecting the best investment plan due to its realistic assumptions & better measure of profitability.
Even you can make use of IRR method it is a great complement to NPV and will provide you accurate analysis for investment decisions.
For more information, you can go to: https://www.wallstreetmojo.com/npv-vs-irr/

Views: 916
WallStreetMojo

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Welcome to this course on Advanced Financial Management - A Comprehensive Study.
In this course you will be expose to the advanced concepts of Financial Management covering
a) Mergers and Acquisitions.
b) Capital Market Instruments
c) Advanced Capital Budgeting Techniques.
d) Risk Analysis in Capital Budgeting
e) Sensitivity and Scenario Analysis in Capital Budgeting
f) Leasing
g) Basics of Derivatives.
h) Portfolio Management - Quantitative Techniques.
i) Dividend Decisions.
The above topics were also available as separate courses. By taking this course, you need not take the separate courses taught by me in the above names.
This course is structured keeping Professional course students in mind like CA / CPA / CFA / CMA / MBA Finance, etc.
This course will equip you for approaching those professional examinations. This course is presented in simple language with examples. This course has video lectures (with writings on Black / Green Board / Note book, etc). You would feel you are attending a real class.
This course is structured in self paced learning style. You would require good internet connection for interruption free learning process. You have to go through the videos leisurely to grab the concepts with clarity.
Take this course to gain strong hold on Advanced Concepts in Financial Management.
• Category:
Business
What's in the Course?
1. Over 143 lectures and 16.5 hours of content!
2. Understand Mergers and Acquistions.
3. Understand Advanced Capital Budgeting Techniques
4. Understand Risk Analysis in Capital Budgeting
5. Understand Sensitivity and Scenario Analysis in Capital Budgeting
6. Understand Leasing
7. Understand Dividend Decisions
8. Understand Basics of Derivative Instruments
9. Understand Portfolio Management - Quanitative Techniques
Course Requirements:
1. Basic knowledge in Financial Management
2. Basic Knowledge in Accounting
Who Should Attend?
1. Professional Course students taking up courses like CA / CPA / CMA / CFA / CIMA / MBA Finance
2. Finance Professionals

Views: 7082
CARAJACLASSES

Download: http://solutionzip.com/downloads/wheel-industries-is-considering-a-three-year-expansion-project/
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.
Required:
Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?
The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?
The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?
Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year's after tax cash flow is given in the table below.
Investment B Investment C
Probability
After Tax
Cash Flow
Probability
After Tax
Cash Flow
0.25
$20,000
0.30
$22,000
0.50
32,000
0.50
40,000
0.25
40,000
0.20
50,000
What is the expected value of each project’s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.
Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.

Views: 625
Solution ZIP

http://subjecttutors.blogspot.in/2013/09/multiple-choice-answers_5454.html
1. When discussing the roles of budgets, a planning role in the budgeting process includes:
2. Operating budgets and financial budgets:
3. Discretionary expenditures:
are usually planned for first
4. In __________, as one budget period passes, planners delete that budget period from the master budget and add another one.
5. The following information applies to Questions 5 and 6.
DH Manufacturing produces a single product that sells for $8. Variable (flexible) costs per unit equal $3.20. The company expects the total fixed (capacity-related) costs to be $7,200 for the next month at the projected sales level of 20,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.
What is the current break-even point in terms of number of units for the next month?
6. Suppose that DH Manufacturing's management believes that a $1,600 increase in the monthly advertising expense will result in a considerable increase in sales. How much must sales increase in a month to justify this additional expenditure?
7. A favorable cost variance of significant magnitude:
8. A flexible budget contains:
cost targets for actual output
9. The following Information applies to questions 9 and 10.
Abita Manufacturing has prepared the following flexible budget for October and it is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.
10. The most likely explanation of the above direct labor variances is that:
11. The purchase of long-term assets results in all of the following except:
12. The cost of capital:
reflects the perceived level of risk that investors require
13. The net present value (NPV) capital budgeting decision method:
14. On a capital project, a net present value of ($250):
15. A 13% internal rate of return (IRR) on a capital project indicates all of the following except:
16. Which of the following indicates an unacceptable capital project?
17. THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 17 AND 18.
Consider the following two mutually exclusive projects, each of which requires an initial investment of $30,000 and both provide cash inflows of $60,000 as shown below. This organization has a 15% cost of capital.
18. Using the net present value criterion, which is the most desirable project?
19. The following Information applies to questions 19 and 20.
Sollberger Company is now investigating three mutually exclusive investment opportunities. The company's cost of capital is 10 percent. Information on the three investment projects under study is given below:
20. Which single investment do you recommend of these three mutually exclusive projects?

Views: 41
Michael Anderson

This is a recorded Engineering Economy class lecture about comparison of alternatives. Please, check class Web page from my Web site for examples of solved problems and additional resources. http://salimian.webersedu.com/courses/IEGR350/
and Note: The videos on this channel are instructional videos developed for the classes that I teach at the Department of Industrial Engineering, Morgan State University in Baltimore Maryland.

Views: 7529
DrSalimian

A short video describing net present value (NPV) analysis that might be used to compare Lean Six Sigma projects and many other types of projects or investments. Presented by EMS Consulting Group http://www.emsstrategies.com

Views: 1109
EMS Consulting Group

This video is about DECISION THEORY of OPERATION RESEARCH which includes certain Methods of decision theory like : minimax, maximin , maximax , minimax regret , laplace and hurwicz.
All this methods are explained in detail with the help of solved numerical. This video will help you to understand this methods and ultimately you are able to solve any question of decision theory.
I hope this video will be a helpful thing for you to understand the basic concept of decision theory and its methods.
Thanks.
JOLLY Coaching.
DECISION MAKING UNDER RISK AND UNCERTAINTY
Decision Making Process
Decision-making is the prerogative of management and the nature of the decisions made will vary according to the status of the manager. At board level, fundamental decisions regarding the objectives of the organization, and the development of a corporate plan to fulfill those objectives will be made. Functional and line management will be involved in operational decisions designed to ensure the successful implementation of the planning decisions. At shop floor level, foremen and line supervisors will be involved in determining the best approach to performing more specific tasks. The importance of decision-making _ the function of management must therefore be emphasised, and at the same time a set of criteria and procedures for decision-making must be specified. A formalised decision-making process is essential for efficient management of the organisation.
Nature of Decisions
Decision-making is concerned with the selection of the preferred course of action from a range of possibilities. The classical concept of decision-making assumes that the decision-maker:
Has complete knowledge of all the possible alternative courses of action.
Has complete knowledge of the consequences of taking every alternative.
Can attach definite payoffs or utilities to each possible outcome.
Can order the payoffs of each course of action in a unique sequence from highest to lowest payoff.
With these assumptions a decision-maker can be regarded as an optimiser when he selects the alternative course of action with the highest payoff.
Four Elements Common to Decision Problems:
1) Actions [Acts/Strategies]: The set of two or more alternatives the decision-maker has chosen to consider. The decision-maker's problem is to choose one action from this set.
2) States of nature: The set of two or more mutually exclusive and collectively exhaustive chance events upon which the outcome of the decision-maker's chosen action depends.
3) Outcomes: The set of consequences resulting from all possible action/state of nature combinations.
4) Objective variable: The quantity used to measure and express the outcomes of a decision problem.
We can identify these four specific elements of the decision problem in our example.
First, a choice must be made between two possible courses of action-rent the out¬door stadium or rent the indoor stadium.
Second, it is uncertain which event will occur-rain or no rain. We refer to these events as states of nature.
Note that the states of nature considered in any problem must be mutually exclusive and collectively exhaustive.
Third, depending on which action is chosen and which state of nature occurs on the evening of the concert, the decision-maker will receive either a financial reward or a penalty for the chosen action. The consequences of the decision problem are referred to as outcomes; these may be either positive or negative. For example, if the action chosen by the promoter is Rent the outdoor stadium and the state of nature that occurs is Rain, the outcome that results is (-Rs. 2 million). The combination Rent the outdoor stadium/No rain will yield a profit of Rs. 17 million. The reward (or penalty) corresponding to each action/state of nature combination is called the outcome or payoff.
Fourth, since the outcome is expressed in terms of net profit, it is objective variable here.
Decision Theory, Statistical Decision Making, State of Nature, Statistics, Operations Research, MBA, MCA, BE, CA, CS, CWA, CMA, CPA, CFA, BBA, BCom, MCom, BTech, MTech, CAIIB, FIII, Graduation, Post Graduation, BSc, MSc, BA, MA, Diploma, Production, Finance, Management, Commerce, Engineering , Grade-11, Grade- 12.
How to solve decision Theory Practically.
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Decision Theory in OP.
SOLVING DECISION THEORY.
DECISION TREE ANALYSIS.
OPERATION RESEARCH.
DECISION THEORY.
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Views: 136823
JOLLY Coaching

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QUANTITATIVE METHODS
Note : Attempt only 8 Questions
1. A company is deciding to choose between two mutually exclusive projects A and B. Project A requires an initial investment of Rs. 3,00,000 and is expected to generate cash flow of Rs. 1,50,000 per annum for the 3 years of its life. Project B, on the other hand, requires 3,40,000, has a life of 6 years and would generate Rs., 1,00,000 every year. Which proposal should be accepted?
2. A repairman is to be hired by a company to repair machines that break down following a Poisson process, with an average rate of four per hour. The cost of non-productive machine time is Rs 90 per hour. The company has the option of choosing either a fast or a slow repairman. The fast repairman charges Rs 70 per hour and will repair machines at an average rate of 7 per hour, while the slow repairman charges Rs 50 per hour and will repair machines at an average rate of 6 per hour. Which repairman should be hired?
3. A company has Rs 6,00,000 to invest, and a total of three investments are available to it. If xj rupees (in lakhs) are invested j, then a net present value (in lakhs of rupees) of vj(xj) is obtained, where vj(xj)’s are given below:
V1(x1) = 7 x1 + 2
V2(x2) = 3 x2 + 7
V3(x3) = 4 x3 + 5
The amount placed in each investment has to be in multiples of Rs 1 lakh only. How should the company invest Rs 6,00,000 in order to maximise the net present value obtained from the investments?

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Answer Sheet

equired:
Compare the results of the three (3) methods by quality of information for decision making. Using what you have learned about the three (3) methods, identify the best project by the criteria of long term increase in value. (You do not need to do further research.) Convey your understanding of the Time Value of Money principles used or not used in the three (3) methods. Review the video titled \u201cNPV, IRR, MIRR for Mac and PC Excel\u201d (located at
https://www.youtube.com/watch?v=C7CryVgFbBc
and previously listed in Week 4) to help you understand the foundational concepts:
Scenario Information:
Assume that two gas stations are for sale with the following cash flows; CF1 is the Cash Flow in the first year, and CF2 is the Cash Flow in the second year. This is the time line and data used in calculating the Payback Period, Net Present Value, and Internal Rate of Return. The calculations are done for you. Your task is to select the best project and explain your decision. The methods are presented and the decision each indicates is given below.
Investmen
t
Sales Pric
e
CF
1
CF
2
Gas Station A
,000
/bin/sh
,000
Gas Station B
,000
,000
,000
Three (3) Capital Budgeting Methods are presented:
1
Payback Period:
Gas Station A is paid back in 2 years; CF1 in year 1, and CF2 in year 2. Gas Station B is paid back in one (1) year. According to the payback period, when given the choice between two mutually exclusive projects, the investment paid back in the shortest time is selected.
2
Net Present Value:
Consider the gas station example above under the NPV method, and a discount rate of 10%:
3
NPV
gas station A
= ,000/(1+.10)
2
- ,000 =
,644
4
NPV
gas station B
= ,000/(1+.10) + ,000/(1+.10)
2
- ,000 =
,115
5
Internal Rate of Return:
Assuming 10% is the cost of funds; the IRR for Station A is 41.421%.; for Station B, 36.602.
6
Summary of the Three (3) Methods:
\u2022
Gas Station B should be selected, as the investment is returned in 1 period rather than

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Learn why NPV and IRR may not provide the same project rankings. Learn how to calculate the rate at which the two projects are equal.
Based on information from Simon Benninga's "Principles of Finance with Excel"

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