Engineering Economic Analysis

484 SELECTIONOF A MINIMUM ATTRACTIVERATEOF RETURN

1

A finn has a budget of $800,000 for projects this year. Which of the following projects should be

accepted? What is the opportunity cost of capital?

Project First Cost Annual Benefit

A $200,000 $25,000

B 250,000 47,000

C 150,000 17,500

D 100,000 20,000

E 200,000 24,000

F 300,000 35,000

G 100,000 18,000

H 200,000 22,500

I 350,000 50,000

Salvage Value

$50,000

-25,000

20,000

15,000

25,000

15,000

o

15,000

o

Life (years)

15

10

15

10

20

15

10

20

25

SO~UTlor,,{

The first step is to use the RATEfunction to find the rate of return for each project. The results of

this step are shown iI1the top portion of FigUre 15-4. Next the projects are sorted in descending

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fIGIJRE'1 15.4 Spreadshee~;.forfindingi opportunity cost of capital.

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A B C D E F G H

Annual Salvage

(^1) Project First Cost Benefit Value Life IRR
2 A 200,000 25,000 50,000 15 10.2% = RATE(E2,C2, -B2,D2)
(^3) B 250,000 47,000 -25,000 10 12.8% I ,
4 C 150,000 17,000 20,000 15 8.6% ,
5 D 100,000 20,OqO 15,000' (^10) 16.0%
6 E 200,000 24,000 25,000 20 10.6%
7 F.... 300,000 I 35,000 15,000 (^15) 8.2% ..
8 G' 100,000 18,000 I. o ", (^10) 12.4%
9 H 200,000 22,500 15,000 20 9.6%
10 I 350,000 50,000 0 I- 25 13.7% I
Cumulative
(^11) Projects Sortedby IRR First Cost
(^12) D 100,000 20,000 15,000 I 10 16.0% 100,000
13 I 350,000 50,000 II (^025) 13.7% 450,000.
-.,...,-:-,-
14 B 250,000 47,000 -2,000 (^10) 12.8% 7oo,006
15 G
,
100,000 18,000_^010 12.4% 800,000
16 E 200,000 24,000 25,000 (^20) " 10.6% 1,000,000
17 A 200,000 25,000 50,000 15 10.2% I1,200,000 -
18 H 200,000 22,500 15,0()() (^20) 9.6% 1,400,000
19 ;"C 150,000 17,500 20,000! (^15) 8;6% , 155();000 ;. :i==
20 F 300,000 35,000 I 15,000 (^15) I 8.2% 1,850,000