Engineering Economic Analysis

Calculate the rate of return and state whether it has

been an acceptable rate of return.

7A-25 Consider the following situation.

Year Cash Flow

o -$200

1 +400

2 -100

What Is the Basic Comparison?

7A-26 An investor is considering two mutually exclusive

projects. He can obtain a 6% before-tax rate of return

on external investments, but he requires a minimum

attractive rate of return of7% for these projects. Use

a 10 year analysis period to compute the incremental

rate of return from investing in ProjectArather than

ProjectB.

7A-27 In January, 2003, an investor purchased a convert-

ible debenture bond issued by the XLA Corporation.

The bond cost $1000 and paid $60 per year interest in

annual payments on December 31. Under the con-

vertible feature of the bond, it could be converted

into 20 shares of common stock by tendering the.

bond, together with $400 cash. The day after the

investor received the December 31, 2005, interest

payment, he submitted the bond together with $4;00

to the XLA Corporation. In return, he received the

20 shares of common stock. The common stock paid

no dividends. On December 31, 2007, the investor

. sold the stock for $1740, terminating his 5-year
investment in XLA Corporation. What rate of return
did he receive?

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Problems

Year Cash Flow

(^0) -$103,000
(^1) 102,700
(^2) -87,000
(^3) 94,500
(^4) -8,300
(^5) 38,500
7A-20 Compute the rate of return on an investmenthaving
the following cash flow.
Year Cash Flow
(^0) -$850
(^0) +600
2-9 +200
10 -1800
7A-21 Assume that the followingcash flowsare associated
with a project.
Year Cash Flow
(^0) -$16,000
(^1) -8,000
(^2) 11,000
(^3) 13,000
(^4) -7,000
(^5) 8,950
Compute the rate of return for this project.
7A-22 Compute the rate of return for the following cash
flow.
Year Cash Flow
(^0) -$200
(^1) +100
(^2) +100
(^3) +100
4 -300
(^5) +100
(^6) +200
7 +200
(^8) -124.5
(Answer:20%)
!3 Followingare the annualcost data for a tomatopress.
Year Cash Flow
(^0) -$210,000
(^1) 88,000
(^2) 68,000
(^3) 62,000
(^4) -31,000
(^5) 30,000
(^6) 55,000
(^7) 65,000
What is the rate of return associated with this
project?
7A-24 A project has been in operationfor 5 years, yielding
the following annual cash flows:
ProjectA: ProjectB:
Build Drive-Up Buy Land
Photo Shop in Hawaii
Initial capital $58,500 $ 48,500

Investment Opportunities

Net uniform 6,648 0

annual income

Salvage value 30,000 138,000

10 years hence

Computedrate 8% 11%

of return