Engineering Economic Analysis

Summary

Summary

FIGURE 7-6 Graphing present worth versusi.

yaxis on this graph has been modified so that thexaxis intersects at a present worth of -50

rather than at O.To do this click on theyaxis, then right-click to bring up the "format axis"

option. Select this and then select the tab for thescaleof the axis. This has a selection for the

intersection of thexaxis. This process ensures that the x-axis labels are outside the graph.

Rate of return may be defined as the interest rate paid on the unpaid balance of a loan such

that the loan is exactlyrepaid if the scheduleof payments is followed. On an investment,rate

of return is the interest rate earned on the unrecovered investment such that the payment

schedule makes the unrecovered investment equal to zero at the end of the life of the

investment.Although the two definitionsof rate of return are stated differently,there is only

one fundamental concept being described. It is that the rate of return is the interest rateiat

which the benefits are equivalent to the costs.

There are a variety of ways of writing the cash flow equation in which the rate of return

imay be the single unknown. Five of them are as follows:

PW of benefits - PW of costs= 0

PW of benefits

=1

PW of costs

NPW= 0

EUAB- EUAC= 0

PW of costs=PW of benefits

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;

11

. ,, II

1'1,[

-~

.-.Q'.....,. _.._C-. .'.'__._...r... ._.._---- ..

A B C D E F

1 Year Cash flow i PW

2 0 -700 0% 150.0 =$B$2 + NPV(D2,$B$3:$B$6)

3 1 100 2% 102.1

4 2 175 4% 58.0

5 ;^3250 6% 17.4

, (^64325) 8% -20.0
7 10% -54.7
8
: 9 150.0
10
'11 '€ 100.0
12 0
13 CQJ'" 50.0
(^14) £
15 0.0
16
-50.0 I
: 17 0% 2% 4% 6% 8% 10%
(^18) Interest rate
(^19) I I I I