Engineering Economic Analysis

206 RATEOF RETURNANALYSIS

An $8200 investment returned $2000 per year over a 5-year useful life. What was the rate of

return on the investment?

Using Equation 7-2, we write

PW of benefits

=1

PW of costs

2000(PI A, i, 5)=1

8200

Rewriting, we see that

8200 =4.1

(PIA, i,5) = 2000

Then look at the compound interest tables for the value ofi where(PIA, i,5) =4.1; if no

tabulated value ofigives this value, we will then find values on either side of the desired value

(4.1) and interpolate to find thelM.

From interest tables we find:

In this example, no interpolation is needed because the internal rate of return is exactly 7%.

.An investment resulted in the following cash flow.Compute the rate,of return.

Year Cash Flow

o -$700

1 + 100

2 +175

3 + 250

4 +325

EUAB- EUAC= 0

100 +75(AI G,i, 4) --700(AI P, i,4)= 0

'""In this situation, we navetwo differentinterestfactors in the equation.We wilLnotbe able to solve

it as easily as ExaIllple 7-1. Since there is no convenient direct method of so!ution, we will solve!"! "'...

.a

.

i

i (P/A,i,S)

6% 4.212

7% 4.100

8% 3.993