A 0 NPV means in difference in terms of the risk reward Taking or not taking

# A 0 npv means in difference in terms of the risk

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A 0 NPV means in-difference in terms of the risk reward. Taking or not taking the project does not make a difference. 4 IE 492 Engineering Economics Subscribe to view the full document.

NET PRESENT VALUE (NPV) EXAMPLE Assume you need to invest \$50,000 in a project. You expect in the 1 st year the cash flow will be \$20,000, 2 nd year will be \$30,000, and in the 3 rd year will be \$30,000. You expect to use return rate of 10%. What is the net present value of the investment. Here we are going to use the NPV formula. In this problem, CF 0 = -50,000 CF 1 = 20,000 x (P/F,i%,n) = 20,000 x (1.10-1,10%,1) = 18,181.82 CF 2 = 30,000 x (P/F,i%,n) = 30,000 x (1.21-1,10%,2) = 24,793.39 CF 3 = 30,000 x (P/F,i%,n) = 30,000 x (1.33-1,10%,3) = 22,539.44 Therefore, NPV = CF 0 + CF 1 + CF 2 + CF 3 = -50,000 + 18,181.82 + 24,793.39 + 22,539.44 = \$15,514.65 Since the NPV is > 0, the project is worth considering . 5 IE 492 Engineering Economics RATE OF RETURN (ROR) 1 Rate of Return is an interest paid on the unpaid balance of an amortized loan / unrecovered project balances. Rate of Return is also a breakeven rate, denoted by i*, at which the present worth of the project is ‘0. PW(i*) = PW Cash inflows PW Cash outflows = 0 This is also a understandable method of project’s profitability, and is generally preferred by managers over the PW method. Internal Rate of Return (IRR) is another term for ROR that stresses the fact that we are concerned with the interest earned on the project that is internally invested, not those portions that are released by (borrowed from) the project. In other words, IRR is the interest charged on the unrecovered balance of the investment such that, when the project terminates, the unrecovered project balance is 0. 6 IE 492 Engineering Economics Subscribe to view the full document.

RATE OF RETURN (ROR) 1 Example: Suppose \$10,000 is invested in a project that is expected to generate \$4,021 every year. Considering the 3 year time frame, what is the internal rate or return (IRR) for this project.  • Summer '16

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