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    Applied Engineering Economics: Dr. Scott J. Amos, PE

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    Sucher Eolas
    1) The document discusses techniques for evaluating cash flows and selecting the best alternative, including present value, future value, equivalent uniform annual value, and discounted rate of return. 2) It provides an example of using the internal rate of return technique to solve for the unknown interest rate that makes the present worth of benefits equal to the present worth of costs. 3) The example calculates a 5.5% rate of return on a $10,000 investment that returned $2,342 per year over 5 years.

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    Applied Engineering Economics: Dr. Scott J. Amos, PE

    Uploaded by

    Sucher Eolas
    124 views1 page
    1) The document discusses techniques for evaluating cash flows and selecting the best alternative, including present value, future value, equivalent uniform annual value, and discounted rate of return. 2) It provides an example of using the internal rate of return technique to solve for the unknown interest rate that makes the present worth of benefits equal to the present worth of costs. 3) The example calculates a 5.5% rate of return on a $10,000 investment that returned $2,342 per year over 5 years.

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    Applied Engineering Economics

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    Engineering Economics

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    1) The document discusses techniques for evaluating cash flows and selecting the best alternative, including present value, future value, equivalent uniform annual value, and discounted rate of return. 2) It provides an example of using the internal rate of return technique to solve for the unknown interest rate that makes the present worth of benefits equal to the present worth of costs. 3) The example calculates a 5.5% rate of return on a $10,000 investment that returned $2,342 per year over 5 years.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    124 views1 page

    Applied Engineering Economics: Dr. Scott J. Amos, PE

    Uploaded by

    Sucher Eolas
    1) The document discusses techniques for evaluating cash flows and selecting the best alternative, including present value, future value, equivalent uniform annual value, and discounted rate of return. 2) It provides an example of using the internal rate of return technique to solve for the unknown interest rate that makes the present worth of benefits equal to the present worth of costs. 3) The example calculates a 5.5% rate of return on a $10,000 investment that returned $2,342 per year over 5 years.

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    of 1

    AACE INTERNATIONAL APPLIED ENGINEERING ECONOMICS

    Chapter 28

    Applied Engineering Economics

    Dr. Scott J. Amos, PE

    INTRODUCTION which benefits are equivalent to costs. Thus the cash flow is
    solved for the unknown value, i. This technique is also
    In the previous chapter, the basic tools for economic analysis known as internal rate of return and can be used with either
    were developed. These tools allow us to manipulate cash present worth or annual worth equivalents.
    flows in many ways and give us the power to compare and
    evaluate cash flow against specified criteria. Application of Example 28.1—
    these tools is the subject of this chapter. In general, econom-
    ic selection criterion will be either maximization of benefits, A $10,000 investment returned $2,342 per year over a 5-
    minimization of costs, or maximization of the net profits. year period. What was the rate of return on this invest-
    Techniques will be presented for evaluation of single as well ment?
    as multiple alternative type problems.
    Solution—Set the present worth of benefits equal to the
    present worth of costs, then algebraically isolate the dis-
    LEARNING OBJECTIVES count factor and treat it as an unknown.

    After completing this chapter, readers should be able to $2,342 (P/A, i, 5) = $10,000
    (P/A, i, 5) = $10,000 = 4.27
    • evaluate and select the best alternative using present $2,342
    value, future value, equivalent uniform annual value,
    and discounted rate of return; and Now look at the compound interest factors in the tables
    • compare alternatives using the benefit-cost ratio. 27.2 and 27.3 for the value of i where (P/A, i, 5) = 4.270;
    since no tabulated value is given, find the values on
    either side of the desired value and interpolate to find
    CASH FLOW ANALYSIS the rate of return i.

    There are two fundamental approaches to the analysis of a From the tables find
    given cash flow, equivalent worth, and rate-of-return.
    i (P/A, i, 5)
    Equivalent Worth—The equivalent worth method simply
    5.0 % 4.379
    converts to one of the basic forms, i.e., the equivalent present
    ? 4.270
    worth, or annual worth, using previously-developed tech-
    6.0 % 4.212
    niques and the required MARR. A negative result means the
    proposed cash flow is unacceptable because it does not pro-
    vide the required return-on-investment. Positive results are
    desirable and indicate an investment that will meet the pre-
    scribed criteria. This technique has been previously illustrat- In this example, the rate of return for the investment was
    ed in examples 27.5 through 27.7. found to be 5.5 percent.

    Rate-of-Return—The fundamental concept behind rate-of-


    return (ROR) analysis is that the ROR is the interest rate at

    28.1

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