Engineering Economic Analysis

....I

236 RATEOF RETURNANALYSIS

$2.5M

t $1.5M

I t $01M

0-1-2-3-4-5-6-7-8

j

-$J.5M ~

-$I.5M 1

-$2.5M

$3.5M

1

-$4M

SOLUTION

Figure 7A-3.shows the spreadsheet calculations and the graph of PW .versusi.

FIGURE7A-3PW versusiforoilwell.

41 this case, there are 2 positiye rpots..at4.73and 37.20%. These roots~ not "seful.1}ris proj7ct",

is a combination of an investment and a loan, so we don't even know if we want a high rate or

a low rate. If our interest rate is about 20%, then the project has a positive PW. However, small

changes~inthe,datacan mak.efor~largechangesin.these,JesuJts.11;':;;1;;:;;'1:10== 1:1I:I:;;== iii!'==-=

It is useful to apply the modified internal rate of return described in the next section.

=

-- .-~ - -

--- - ---

A B. C D E F G

1 Year Cash Flow i PW

2 0 -4.00 0% -0.50 =$B$2 + NPV(D2,$B$3:$B$9)

(^31) 3.50 5% 0.02
4 2 2.50 10% 0.28
5 3 1.50 15% 0.37
(^64) 0.50 20% 0.36
7 5 -0.50 25% 0.29
(^86) - 1.50 30% 0.19
(^97) -2.50 35% 0.06
10 40% -0.08
11 root 4.73% 45% -0.22
12 root 37.20% 50% -0.36
(^130040)
14
/
15 0.20
(^16) 0.00
17
I

c..

18 -0.20

(^19) -0040
(^20) I I I
21 -0.60
0% 10% 20% 30% 40% 50%
22 i