Finding RoR_Lecture
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Transcript of Finding RoR_Lecture
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Contemporary Engineering Economics, 4th edition, 2007Methods for Finding the Rate of ReturnLecture No. 25Chapter 7Contemporary Engineering EconomicsCopyright 2006
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Simple versus Nonsimple InvestmentsSimple Investment: The project with only one sign change in the net cash flow
Nonsimple investment: an investment in which more than one sign change occurs in the net cash flow series
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Example 7.1 Investment ClassificationProject A: a simple investmentProject B: a nonsimple investmentProject C: a simple borrowing
PeriodnNet Cash FlowProject AProject BProject C01234-1,000-5008001,5002,000-1,0003,900-5,0302,1451,000-450-450-450
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Predicting Multiple i*sNet Cash Flow Rule of SignsThe number of real i*s that are greater than -100% for a project with N periods is never greater than the number of sign changes in the sequence of the cash flows. A zero cash flow is ignored.Accumulated Cash Flow Sign TestIf the sequence of accumulated cash flow series starts negatively and changes sign only once, then a unique positive i* exists
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Net Cash Flow Rule of Signs- 100% < i *< infinity Net Cash Flow Rule of SignsNo. of real RORs (i*s)
0, then increase i. If PW(i) < 0, then decrease i.
PW(18%) = -$749
Step 4: If you bracket the solution, you use a linear interpolation to approximate the solution 3,5530-74915%i18%Note: This method works onlyfor finding i* for simple investments.
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Graphical Method Step 1: Create the NPWprofile.
Step 2: Find the point at which the curve crossesthe horizontal axis closelyapproximates i*
Contemporary Engineering Economics, 4th edition, 2007
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Contemporary Engineering Economics, 4th edition, 2007Using Cash Flow Analyzer Project DInput dataOutput196%
Contemporary Engineering Economics, 4th edition, 2007