CEE QUIZ 2

To be considered attractive, a capital project must provide a return that exceeds a minimum level established by the organization.
MARR reflects this minimum level.
Definition: MARR is an interest rate that one is willing to accept, or the rate one desires to earn on investments.
It determines when the rate-of-return on an investment equals the benefits and costs.

MARR is determined based on various factors, including:
- Amount, source, and cost of money available
- Number and purpose of good projects available
- Perceived risk of investment opportunities
- Type of organization

Making decisions involves examining feasible design alternatives, focusing on mutually exclusive alternatives where the selection of one excludes the others.

Under economic considerations, alternatives can have different initial investments with varying annual revenues and costs, yet must provide comparable usefulness in performance and quality.
Basic methods from Chapter 5 provide the foundation for economic comparison of alternatives.

Investment Alternatives
- These require an initial capital investment that generates positive cash flows from increased revenue or cost savings.
- The present worth of all cash flows must be positive at the MARR to be considered attractive.
- Choose the alternative with the largest PW.
Cost Alternatives
- These alternatives typically involve all negative cash flows with a possible positive cash flow from asset disposal at the end of the project's life.
- The PW of all cash flows will be negative, and the alternative with the smallest absolute PW should be chosen.

The present worth is commonly found by discounting all cash inflows and outflows to the present using an interest rate typically set as the MARR.

Cash received at the end of year k at an interest rate of i% per year can be represented mathematically:
$PW = rac{1,000}{(1+i)^k}$
The effects of MARR values on future cash flows include:
- Higher MARR reduces future cash flow value.
- Lower MARR increases future cash flow value.

To evaluate and compare mutually exclusive alternatives, the net present worth (NPW) of life-cycle cash flows is computed using:
$Net ext{ }PW = PW(Revenues) - PW(Costs)$
Cash flows incorporate all lifecycle revenues and costs.

Zero Net PW: Alternative is as good as “do nothing”; rate-of-return equals MARR.
Positive Net PW: Indicates an economical alternative, better than “do nothing” and exceeds MARR.
Negative Net PW: Indicates the alternative is not economical and falls below MARR.

Certainty about future cash flows.
Ability to borrow and lend money at the same interest rate—idealized “perfect capital markets” (no taxes/commissions).

Scenario: Initial investment of $50,000 returning $18,000 annually for 4 years at MARR of 12%.
- Calculation:
  $Net ext{ }PW = PW(Revenues) - PW(Costs)$
  $PW = 18,000 (P/A, 12%, 4) - 50,000$
  $PW = 54,671.4 - 50,000 = 4,671.40$
- Conclusion: This investment is good!

Choosing between two investments (A & B) with their respective cash flows.
- MARR of 10% applied.
- Calculations yield respective PW values revealing that Alternative B is economically superior despite both being attractive.

Analysis with MARR of 12% compares costs of two alternatives (C & D).
- Results indicate Alternative D is preferred due to its lesser negative PW.

Necessary for visual comparison of cash flows from alternatives, emphasizing their differences.

Discussion of how to determine necessary funds for an endowment that covers scholarships and awards using the capitalized worth method.

CW: A variation of present worth, representing the present worth of all revenues or expenses over a perpetual period.
Useful for endowments and public projects with indefinite lifetimes.

Analysis is predicated on the MARR.
Alternatives with higher net PWs are preferred.
The choice of preferred alternatives is contingent upon the MARR value and must utilize the same analysis period for accurate comparison.