Lec%2020_Full - IE 343 Engineering Economics Lecture 20:...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: IE 343 Engineering Economics Lecture 20: Chapter 5 Evaluating a Single Project Instructor: Tian Ni Oct.12, 2011 IE 343 Fall 2011 1 Homework 5 is due on Friday Oct. 14 in class Quiz 5 will be given next Wednesday Oct. 19 IE 343 Fall 2011 Announcement 2 Formally, (using the PW formulation), IRR is the such that: Alternatively, IE 343 Fall 2011 Internal Rate of Return (IRR) method = = = N k k N k k k i F P E k i F P R ) %, , / ( ) %, , / ( % i period) study (or life project : year for expenses : year for (receipts) revenues : N k E k R k k [ ] ) %, , / ( ) %, , / ( = = = N k k k k i F P E k i F P R PW 3 Rule: If of the IRR method MARR, the project is profitable. (The internal rate of return IRR is higher than my expected rate of return MARR) if of the IRR method < MARR, the project is not profitable. (The internal rate of return IRR is smaller than my expected rate of return MARR) IE 343 Fall 2011 Internal Rate of Return (IRR) method % i % i 4 How to solve for ? Back to Example 5.1: IE 343 Fall 2011 How to calculate IRR Example 5.1 % i [ ] ) %, , / ( ) %, , / ( = = = N k k k k i F P E k i F P R PW . ) 1 ( 000 , 20 ) 1 ( 1 ) 1 ( 000 , 35 000 , 100 %) ( . ) 5 %, , / ( 000 , 20 ) 5 %, , / )( 000 , 5 000 , 40 ( 000 , 100 %) ( 5 5 5 = + + + + + = = + + = i i i i i PW i F P i A P i PW 5 IE 343 Fall 2011 Example 5.1 Excel IRR function 6 IRR = 25.31% IE 343 Fall 2011 Example 5.1 VBA trial and error 7 IRR = 25.31%, PW(25.31%) = 2.613 IE 343 Fall 2011 Example 5.1 Linear Interpolation i% PW 25 679.5 i' 0 30 -9,368.48 PW i% Interest 679.5 25% 30% -9,368.48 i% 8 IE 343 Fall 2011 Example 5.1 Linear Interpolation . profitable is project the therefore %), 20 ( % % 338 . 25 % % 5 . 679 % 25 % 5 . 679 368 , 9 % 25 % 30 MARR i i i i = = 9 IRR is the root of a high order polynomial. IRR may not exist or there may be multiple interest rates that could make PW(IRR) = 0. (If this is the case, use other methods to evaluate the project.) IE 343 Fall 2011 Problems with the IRR method 10 The IRR method assumes that net receipts less expenses (recovered funds) each period are reinvested at , which may be impossible in some cases. Computationally difficult. There could be multiple IRRs IE 343 Fall 2011 Problems with the IRR method % i 11 ERR assumption : Suppose that net cash flows generated by the project can be reinvested at an external investment rate ( ). (Usually = MARR.) IE 343 Fall 2011 External Rate of Return (ERR) method 12 Formally, ERR is the such that: Note: = MARR IE 343 Fall 2011 External Rate of Return (ERR) method...
View Full Document

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 University-West Lafayette.

Page1 / 49

Lec%2020_Full - IE 343 Engineering Economics Lecture 20:...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online