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Unformatted text preview: IE 343 Engineering Economics Lecture 17: Chapter 5 – Evaluating a Single Project Instructor: Tian Ni Oct.3, 2011 IE 343 Fall 2011 1 Quiz 4 and Homework 4 are placed in GRIS269 Homework 5 has been posted on Blackboard VISTA and is due Oct. 14 IE 343 Fall 2011 Announcement 2 Chapter 5  Evaluating a Single Project IE 343 Fall 2011 3 Methods to evaluate profitability Present Worth (PW) Future Worth (FW) Annual Worth (AW) Internal Rate of Return (IRR) External Rate of Return (ERR) Methods to evaluate liquidity Simple payback period Discounted payback period IE 343 Fall 2011 Methods 4 Present Worth method (PW) IE 343 Fall 2011 5 You invest $100 now Your minimum attractive rate of return (MARR) is 10% Suppose you get $110 at EOY 1 What is the present worth of your investment? Are you satisfied under MARR = 10%? IE 343 Fall 2011 (PW) method – Simple Example 1 6 PW(10%) = 100 + 110(P/F, 10%, 1) = 100 + 110/(1+10%) = 100 – 100 = 0 Yes, I recovered my initial investment under my expected MARR = 10%. PW(10%) ≧ 0 IE 343 Fall 2011 (PW) method – Simple Example 1 7 0 1 $110 MARR = 10% $100 You invest $100 now Your minimum attractive rate of return (MARR) is 10% Suppose you get $121 at EOY 2 What is the present worth of your investment? Are you satisfied under MARR = 10%? IE 343 Fall 2011 (PW) method – Simple Example 2 8 PW(10%) = 100 + 121(P/F, 10%, 2) = 100 + 100 = 0 Yes, I recovered my initial investment under my expected MARR = 10%. PW(10%) ≧ 0 IE 343 Fall 2011 (PW) method – Simple Example 2 9 0 1 $121 MARR = 10% $100 2 You invest $200 now Your minimum attractive rate of return (MARR) is 10% Suppose you get $110 at EOY 1, 121 at EOY 2 What is the present worth of your investment? Are you satisfied under MARR = 10%? IE 343 Fall 2011 (PW) method – Simple Example 3 10 PW(10%) = 200 + 110(P/F, 10%, 1) + 121(P/F, 10%, 2) = 200 + 100 + 100 = 0 Yes, I recovered my initial investment under my expected MARR = 10%. PW(10%) ≧ 0 IE 343 Fall 2011 (PW) method – Simple Example 3 11 0 1 $110 MARR = 10% $200 $121 2 You invest $100 now Your minimum attractive rate of return (MARR) is 10% Suppose you get $110 at EOY 2 What is the present worth of your investment? Are you satisfied under MARR = 10%? IE 343 Fall 2011 (PW) method – Simple Example 4 12 PW(10%) = 100 + 110(P/F, 10%, 2) = 100 + 90.91 = 9.09 No, I did not fully recover my initial investment under my expected MARR = 10%. PW(10%) ≦ 0 IE 343 Fall 2011 (PW) method – Simple Example 4 13 0 1 $110 MARR = 10% $100 2 Present Worth (PW) method compare the cash flows at present time (now), so discount all cash flows to the present time by using the MARR as the interest rate i% . ( i% = MARR) IE 343 Fall 2011 Present Worth (PW) method N N i F i F i F i F i PW − − − + + + + + + + + = ) 1 ( ... ) 1 ( ) 1 ( ) 1 ( %) ( 2 2 1 1 ∑ = − + = N k k k i F i PW ) 1 ( %) ( 14...
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This note was uploaded on 01/28/2012 for the course IE 343 taught by Professor Vincent,g during the Winter '08 term at Purdue UniversityWest Lafayette.
 Winter '08
 Vincent,G

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