Rate of Return Analysis

Rate of Return Analysis - Rate of Return Analysis ME 434...

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1 ME 434 Rate of Return Analysis 1 Rate of Return Analysis ME 434 Han P. Bao Department of Mechanical Engineering ME 434 Rate of Return Analysis 2 Preliminaries • Various names have been used in reference to this analysis: – Rate of Return Analysis (RR) – Internal Rate of Return (IRR) – Marginal Efficiency of Capital • Minimum Attractive Rate of return (MARR): – Basic rate against which all RRs are compared – MARR is an internal decision criterion – The more risky the project the higher the MARR • IRR is the interest rate at which the benefits are equivalent to the costs • IRR is solved by making PW(Benefits) = PW(Costs)
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2 ME 434 Rate of Return Analysis 3 Example 1 An investment that requires $1000 will yield a revenue of $450 per year for the next 4 years. What is the internal rate of return (IRR) for this investment? Answer : PW(Benefits) =A(P/A,i%,n) = 450( P/A,i%,n) and PW (Costs) = 1000 Solve for i by putting PW(Benefits) = PW(Costs): (P/A, i%,4) =1000/450 = 2.223
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This note was uploaded on 10/26/2010 for the course ME 434W taught by Professor Bao during the Spring '10 term at Old Dominion.

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Rate of Return Analysis - Rate of Return Analysis ME 434...

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