Chapter 7: Calculating Rate of Return
What is the MARR sometimes called in the business industry?
"hurdle rate"
Rate of Return
- most frequently used exact analysis technique in industry - easily understood compared to NPW or EUAC or EUAB
How do you calculate rate of return?
1. PW of benefits - PW of costs = 0 2. (PW of benefits)/(PW of costs)=1 3. NPW=0 4. EUAW=EUAB-EUAC=0 5. PW of costs=PW of benefits
What is incremental analysis?
1. use delta IRR 2. compare increments of investments (higher initial-cost alt *minus* the lower-initial cost alt) 3. compare delta IRR with MARR
MARR
a preselected rate of return to compare to the calculated rate of return
If delta IRR is > or = MARR...
choose the *higher*-cost alternative
If delta IRR is < or = MARR
choose the *lower*-cost alternative
What rate of return do you use when considering two alternatives?
incremental rate of return (delta IRR)
Internal Rate of Return
the interest at which the present worth and equivalent uniform annual worth are equal to 0 (benefits=costs)
Internal Rate of Return on an Investment
the interest rate earned on the un-recovered *investment* so un-recovered investment=0 after last cash flow
Internal Rate of Return on a Loan
the interest rate paid on unpaid balance so that balance=0 after final payment
If the rate of return is > or = to the MARR,
the investment is attractive
What is true about PW, PW, NPW, and NPW?
they are *all the same*