L06 Slide 67 Minimum Acceptable Rate of Return MARR For your interest rate you

L06 slide 67 minimum acceptable rate of return marr

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L06 Slide 67 Minimum Acceptable Rate of Return (MARR) For your interest rate, 𝑖 , you should use the client’s minimum acceptable rate of return MARR depends on: - Risk - Industry - Opportunity cost - Inflation Research to find an appropriate MARR
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L06 Slide 68 Interest To convert from one compounding schedule to another the equivalent effective rate must be calculated 𝑖 = 1 + 𝑖 ∗ 𝑚 − 1 𝑖 = Given rate (e.g. annual rate) 𝑖 = Equivalent effective rate (e.g. monthly) 𝑚 = Number of compounding periods
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L06 Slide 69 Equivalent Annual Cost Convert all the cash flows to an equivalent annual cost or benefit Directly compare the equivalent annual cost for your two alternatives
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L06 Slide 70 Example 1 Solar Thermal System The owner of a single family residence is considering offsetting a portion of their space and water heating with a solar thermal system. The home owner is presented with options for three different systems. The current all-electric system costs $1000 per year operate. Assume MARR = 10% A B C Solar Collector (sq ft) 100 200 500 Storage Tank 500 500 1000 Capital Cost $2000 $4000 $10,000 Useful life (yr) 20 20 20 Salvage value 0 0 $1000 Annual Energy Savings 30% 50% 90%
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L06 Slide 71 1. Draw a cash flow diagram for each option. 2. Calculate the NPV for each option. 3. Recommend a system to the homeowner. 4. You can use the equivalent annual cost as well. Example 1 Solar Thermal System
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L06 Slide 72 Example 2 Fryers Midterm 2011 Mike's Burger Shack has decided to expand into the French fry market. After some research, the owner has narrowed down his options to two types of fryers. Mini-fry-o-matic De Uber Fryer
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L06 Slide 73 Example 2 Data Mini-fry-o-matic: Counter top electric fryer Purchase price: $50 Maintenance: $0 (not worth repairing) Electricity: $500/year Lifespan: ~ 1 year Ave 1 order of fries / 5 min De Uber Fryer: Large natural gas fryer Purchase price: $1500 Maintenance: $100/year Natural gas: $2000/year Lifespan: ~ 5 years Ave 1 order of fries / min Salvage value: $200 Shack: 8 hour / day 480 orders of fries / day Plan for 5 years
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L06 Slide 74 Payback Period You are considering 3 options with the following cash flows. If you use the payback period method what decision would you come to? End-of-Year A B C 0 -30 -30 -30 1 10 8 10 2 10 10 10 3 10 12 10 4 10 14 0 5 10 16 0 6 10 18 0 Payback
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  • Fall '09
  • MURRAYTHOMSON

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