E7_ror_comp_key - Event 7 Rate of Return Lessons 14 and 15...

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1 Event 7 – Rate of Return Lessons 14 and 15 Methods for Comparing Projects Present Worth Method : Select a study period, usually the least common multiple of the lives. Find the NPW of each alternative over the study period and select the best. The interest rate for the NPW computation is the MARR. Annual Worth Method : Compute the net annual worth of each alternative and select the best. The interest rate for the NAW computation is the MARR. Rate of Return Method : Do incremental analysis. 1. Rank the alternatives in order of increasing investment. 2. The defender is the alternative with the smallest investment and the challenger is the alternative with the second lowest investment. 3. Find the IRR of the challenger over the defender. If the IRR is greater than or equal to the MARR accept the challenger and discard the defender. If the IRR is less than the MARR accept the defender and discard the challenger. The remaining alternative becomes the defender. 4. If some alternatives have not been considered, let the one with the next greater investment be the challenger and return to step 3. 5. If all alternatives have been considered, stop. Select the defender as the best alternative. 1. Consider Pedro’s 3-truck and 1-truck options considered in Event 6. The Economic add-in analysis forms for the two options are included in the E7_student.xls workbook. For this problem, we add the option for Pedro to make no investment. This is called the “Do Nothing” option. a. Compare the two options on a cash basis. What interest rate do you use to compare the options on a cash basis? ______ 0% Which should Pedro select? __________________ 3-Truck Option Profit for 5 years Annual profit 3-Truck Option $78,650 $15,730 1-Truck Option $39,550 $7,910 Do Nothing 0 0
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2 Project Definition Periods Rates (%) Worth($) Name Pedro Life (yrs) 5 MARR(/yr) 0.% Present (Life) 78650 Repetitions 1 Uniform (Life) 15730 Study Period 5 Present (SP) 78650 IRR Net Investment Investment Data - Amounts Negative for Investments Index Description Amount($) Type Start End Salvage Factor Fin. NPW($) 1 Truck Cost (72000) Investment 0 5 33.33% 0.6667 (48000) Cash Flow Data - Amounts Negative for Expenditures and Positive for Revenues Index Description Amount($) Type Start End Parameter Factor CF. NPW($) 1 Insurance (3600) Uniform 1 5 1 5.0000 (18000) 2L icense (300) Uniform 1 5 1 5.0000 (1500) 3 Fixed Fuel (900) Uniform 1 5 1 5.0000 (4500) 4 Maintenance (1200) Uniform 1 5 1 5.0000 (6000) 5 Maint Grad. (600) Grad 2 5 1 10.0000 (6000) 6Repa i rs (600) Uniform 3 5 1 3.0000 (1800) 7 Repairs Grad. (600) Grad 4 5 1 3.0000 (1800) 8 Shredder (5000) Single 0 *** *** 1.0000 (5000) 9Ped ro (30000) Uniform 1 5 1 5.0000 (150000) 10 Shredder (5000) Single 2 *** *** 1.0000 (5000) 11 Trimmers (60000) Uniform 1 5 1 5.0000 (300000) 12 Overhead (24000) Uniform 1 5 1 5.0000 (120000) 13 Supplies (12500) Uniform 1 5 1 5.0000 (62500) 14 Variable Fuel (750) Uniform 1 5
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E7_ror_comp_key - Event 7 Rate of Return Lessons 14 and 15...

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