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*