Finding RoR_Lecture

Contemporary Engineering Economics, 4th edition, 2007Methods for Finding the Rate of ReturnLecture No. 25Chapter 7Contemporary Engineering EconomicsCopyright 2006

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Simple versus Nonsimple InvestmentsSimple Investment: The project with only one sign change in the net cash flow

Nonsimple investment: an investment in which more than one sign change occurs in the net cash flow series

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Example 7.1 Investment ClassificationProject A: a simple investmentProject B: a nonsimple investmentProject C: a simple borrowing

PeriodnNet Cash FlowProject AProject BProject C01234-1,000-5008001,5002,000-1,0003,900-5,0302,1451,000-450-450-450

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Predicting Multiple i*sNet Cash Flow Rule of SignsThe number of real i*s that are greater than -100% for a project with N periods is never greater than the number of sign changes in the sequence of the cash flows. A zero cash flow is ignored.Accumulated Cash Flow Sign TestIf the sequence of accumulated cash flow series starts negatively and changes sign only once, then a unique positive i* exists

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Net Cash Flow Rule of Signs- 100% < i *< infinity Net Cash Flow Rule of SignsNo. of real RORs (i*s)

0, then increase i. If PW(i) < 0, then decrease i.

PW(18%) = -$749

Step 4: If you bracket the solution, you use a linear interpolation to approximate the solution 3,5530-74915%i18%Note: This method works onlyfor finding i* for simple investments.

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Graphical Method Step 1: Create the NPWprofile.

Step 2: Find the point at which the curve crossesthe horizontal axis closelyapproximates i*

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007Using Cash Flow Analyzer Project DInput dataOutput196%

Contemporary Engineering Economics, 4th edition, 2007