Engineering Economic Analysis

Appendix 7A Difficulties in Solving for an Interest Rate

7-55

The company uses a MARR of 15%. Using rate of

return analysis, wpich alternative should be selected?

Two alternatives are being considered:

First cost

Uniform annual benefit

Useful life, in years

A

$9200

$1850

8

B

$5000

$1750'

4

7-56

If the minimum attractive rate of return is 7%, which

alternative should be selected?

Jean has decided it is time to purchase a new battery

for her car. Her choices are:

First cost

Guarantee period, in months

Zappo

$56

12

Kicko

$90

24

Jean believes the batteries can be expected to last

only for the guarantee period. She does not want to

invest extra money in a battery unless she can ex-

pect a 50% rate of return. If she plans to keep her

present car another 2 years, which battery should she

buy?

7-57 Twoalternatives are being considered:

Initial cost

Uniform annual benefit

U sefullife, in years

A

$9200

1850

8

B

$5000

1750

4

Base your computations on a MARR of 7% and an

8-year analysis period. If identical replacement is as-

sumed, which alternative should be selected?

7-58 Twoinvestmentopportunitiesare as follows:

First cost

Uniform annual benefit

End-of-useful-life salvage value

U sefullife, in years

A

$150

25

20

15

B

$100

22.25

o

10

At the end of 10 years, Alt.Bis not replaced. 'Thus,

the comparison is 15 years ofAversus 10 years of

B.If the MARR is 10%, which alternative should be

selected?

APPENDIX 7A Difficulties in Solving

for an Interest Rate

Mter completing this chapter appendix, students should be able to:

.Describe why some project's cash flows cannot be solved for a single positive interest

rate.

·Identify when multiple roots can occur.

. Evaluate how many potential roots exist for a particular project.
.Use themodified internal rate of return (MIRR)methodology in multiple-root
cases.

Example 7A-I illustrates the situation.