Engineering Economic Analysis

(^206) RATEOF RETURN ANALYSIS j
I

I

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

return on the investment?

J ...

ScpLUTION

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

(PIA, i,5)=- 2000 =4.1

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 the IRR.

From interest tables we find:

i (PIA, i, s)

6% 4.212

7% 4.100

8% 3.993

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

..~OLUTION

EUAB- EUAC= 0

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

In this situation, we have two different interestfactors in the equation. We wilLnotbe able to solve

it as easily as Example 7-1. Since there is no convenient direct method of solution, we will solve