There are other various way to calculate ROR with one of the ways being by

# There are other various way to calculate ror with one

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There are other various way to calculate ROR, with one of the ways being by trial and error. We can also see from the cash flows the number of times the sign changes, which then determines if it is simple or complex. 7 Year Beginning Project Balance Return on Invested Capital (10%) Cash Generated from Project Project Balance at End of Year 0 (\$10,000) \$0 \$0 (\$10,000) 1 (\$10,000) (\$1,000) \$4,021 (\$6,979) 2 (\$6,979) (\$698) \$4,021 (\$3,656) 3 (\$3,656) (\$366) \$4,021 (\$1) Marginal value ~ in 3 years the project balance reaches \$0 IE 492 Engineering Economics

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PAYBACK PERIOD (PP) Payback period focuses on the time it takes for the company to recover its initial investment. Payback assumes that all things are equal, and when evaluating multiple projects, the project with the shortest payback is a better investment. Any benefits after the payback period are ignores or rather irrelevant for this analysis / evaluation. Payback period also ignores time value of money to some extent, and therefore this method is good for “back of the envelope” calculation, but not for a comprehensive evaluation of alternatives. Payback Period = (Project cost or Investment) / Annual Cash In Flows. Annual cash in flows represents average annual cash in flow. 8 IE 492 Engineering Economics
PAYBACK PERIOD (PP) EXAMPLE Assume a project with the following cash flows: Year 0: - \$20,000 Year 1: \$5,000 Year 2: \$10,000 Year 3: \$8,000 Year 4: \$2,000 What is the payback period? From inspection we can see at year 3 the project in flows are greater than the initial project out flows i.e. (\$5,000 + \$10,000 + \$8,000) > \$20,000 Therefore, Payback Period should be somewhere in year 3. Calculation: Average annual cash flows: \$6,250 (Average of Y1-Y4 cashflows) Payback: \$20,000 / \$6,250 = 3.20 years Payback: \$20,000 / \$6,250 = 3.20 years . 9 IE 492 Engineering Economics

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BENEFIT COST ANALYSIS Benefit Cost Analysis is typically used for public projects.
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