Engineering Economic Analysis

*This small unrecovered investment indicates that the rate ofreturn is slightly less than 131/2%.

If in Figure 7-1 net present worth (NPW) had been computed for a broader range of

values ofi,Figure 7-2 would have been obtained. From this figure it is apparent that the

error resulting from linear interpolation increases as the interpolation width increases.

-50

FIGURE 7-2 Replot ofNPW versus interest rateiover a larger range of values.

Plot ofNPW versus Interest Ratei

Figure 7-2-the second.plot of NPW versus interest ratei-is an important source of

information. For. a cash flow representing an investment followed by benefits from the

investment, the plot ofNPW versusi(we will call it an NPW plot for convenience)would

have the form of Figure 7-3.

FIGURE 7-3 NPW plot for a typical investment.

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Calculating Rateof Return^209

Unrecovered 13% % Return on Investment Unrecovered

Investment at Unrecovered Repayment at Investment at

Year Cash Flow Beginning of Year Investment End of Year End of Year

(^0) -$100
1 +20 $100.0 $13.5 $ 6.5 $93.5
(^2) +30 93.5 12.6 17.4 76.1
3 +20 76.1 10.3 9.7 66.4.
(^4) +40 66.4 8.9 31.1 35.3
(^5) +40 35.3 4.8 35.2 0.1*
+50
'€
cu
'"
£-^0
Year Cash Flow
0 -p
(^1) +BenefitA
(^2) +A

• (^3) +A i=:
  (^4) +A^0