[5] Project Interactions

Question 1

[Prioritization of Projects in a Portfolio] Idea

Answer 1

• I have a certain budget
• Sort the projects with higher PI
• Choose the higher PI projects until meet the budget

Question 2

[Replacement Analysis] Definitions

Answer 2

• The “defender” is the equipment
• The “challenger” is the best available replacement equipment
• Reasons for replacement: (i) obsolescence; (ii) depletion; and (iii) deteriorization

Question 3

[Replacement Analysis] Differential Cash-flow (DCF)

Answer 3

DCF = B - A

• 3 criteria are met (time, discount rate, risk)
• Calculate the two functions, and discover to which values of discount rate we choose each project
• When NPV and IRR are contradictory

Question 4

[Replacement Analysis] Equivalent Average Annual Cost (EAAC)

Answer 4

EAAC = PV/a_n|i

• PV = Initial cost + Annual cost * a_n|i (if infinite then use p_n|i)
• Time criteria not met
• Choose the lower EAAC

Question 5

[Project Selection] Minimum Common Time Horizon (MCTH)

Answer 5

MCTH = n_A * n_B

• Time criteria not met
• Choose the higher NPV
• Sometimes can get really big

Question 6

[Project Selection] Equivalent Average Annual Cash-flow (EAACF)

Answer 6

EAACF = NPV/a_n|i

• Time criteria not met
• Choose the higher EAACF

Question 7

[Project Selection] Infinite Replication NPV NPV(n, inf)

Answer 7

NPV(n, inf) = EAACF/i

• Discount rate criteria not met
• Choose the higher NPV(n, inf), we want higher cash-flow
• Can be done with the EAAC, in that case we choose the lowest NPV(n, inf), we want lower cost