Engineering Economic Analysis

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Rationing Capital by Rate of Return

the equatiop by trial and error. Tryi=5% first:

EUAB - EUAC= 0

100 +75(AjG, 5%, 4)-700(Aj P,5%, 4) = 0

100 + 75(1.439) - 700(0.2820)= 0

Ati= 5%,

EUAB- EUAC=208 -197 =+11

The EUAC is too low. If the interest rate is increased, EUAC will increase. Tryi=8%:

EUAB- EUAC= 0

100+75(AjG,8%,4)-700(Aj P,8%,4) = 0

100 + 75(1.404)- 700(0.3019) = 0

--I

Ati =8%,

EUAB - EUAC = 205 - 211 =-6

-I'

This time the EUAC is too large. We see that the true rate of return is between 5% and 8%. Try

i =7%:

EUAB- EUAC= 0

100 +75(AjG, 7%, 4)-700(Aj P,7%, 4) = 0

100 + 75(1.416) - 700(0.2952) = 0

Ati= 7%,

EUAB -EUAC -.:...206 - 206= 0

The IRR is 7%.

Calculate the rate of return on the investment on the following cash flow.

Year

o 1 2 3 4 5

Cash Flow

-$100

+20

+30

+20

+40

+40

=

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