Berkshire Controllers usually finances its engineering projects with a combination of debt and equity capital. The resulting
Question:
Berkshire Controllers usually finances its engineering projects with a combination of debt and equity capital. The resulting MARR ranges from a low of 4% per year, if business is slow, to a high of 10% per year. Normally, a 7% per year return is expected. Also the life estimates for assets tend to go down about 20% from normal in a vigorous business environment and up about 10% in a receding economy. The following estimates are the most likely values for two expansion plans currently being evaluated. Plan A will be executed at one location; Plan B will require two locations.
All monetary estimates are in $1000 units.
At the weekly meeting, you were asked to examine the following questions from Berkshire's president.
1. Are the PW values for plans A and B sensitive to changes in the MARR?
2. Are the PW values sensitive to varying life estimates?
3. Is the breakeven point for the first cost of plan A sensitive to the changes in MARR as business goes from vigorous toreceding?
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...
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