FAITH COLLEGES

COLLEGE OF ENGINEERING

ENGINEERING ECONOMICS
SUMMER 2020-2021

ENGR. KENT PATRICK FERRARO

 TOPIC 3
ECONOMIC STUDY
METHODS
COMPOUND INTEREST FACTORS
1. Compound Amount Factor
converting P to F
𝐹 = 𝑃(1 + 𝑖)𝑛
(𝐹 Τ𝑃 , 𝑖, 𝑛) = (1 + 𝑖)𝑛
COMPOUND INTEREST FACTORS
2. Present Worth Factor
converting F to P
𝑃 = 𝐹(1 + 𝑖)−𝑛
(𝑃Τ𝐹 , 𝑖, 𝑛) = (1 + 𝑖)−𝑛
COMPOUND INTEREST FACTORS
3. Sinking Fund Factor
converting F to A
𝐹𝑖
𝐴=
1+𝑖 𝑛−1
𝑖
(𝐴Τ𝐹 , 𝑖, 𝑛) = 𝑛
1+𝑖 −1
COMPOUND INTEREST FACTORS
4. Uniform Series Compound Amount Factor
converting A to F
𝐴 1+𝑖 𝑛−1
𝐹=
𝑖
1+𝑖 𝑛−1
(𝐹 Τ𝐴 , 𝑖, 𝑛) =
𝑖
COMPOUND INTEREST FACTORS
5. Capital Recovery Factor
converting P to A
𝑃 𝑖 (1 + 𝑖)𝑛
𝐴=
1+𝑖 𝑛−1
𝑖 1+𝑖 𝑛
(𝐴Τ𝑃 , 𝑖, 𝑛) =
1+𝑖 𝑛−1
COMPOUND INTEREST FACTORS
6. Series Present Worth Factor
converting A to P
𝐴 1+𝑖 𝑛−1
𝑃=
𝑖(1 + 𝑖)𝑛
1+𝑖 𝑛−1
(𝑃Τ𝐴 , 𝑖, 𝑛) =
𝑖 1+𝑖 𝑛
SUMMARY
CAF Present Future (1 + 𝑖)𝑛 (𝐹 Τ𝑃 , 𝑖, 𝑛)
SUMMARY

−𝑛
PWF Future Present 1+𝑖 (𝑃Τ𝐹 , 𝑖, 𝑛)
SUMMARY

𝑖
SFF Future Annuity 𝑛 −1 (𝐴Τ𝐹 , 𝑖, 𝑛)
1+𝑖
SUMMARY

1+𝑖 𝑛 −1
USCAF Annuity Future (𝐹 Τ𝐴 , 𝑖, 𝑛)
𝑖
SUMMARY

𝑖 1+𝑖 𝑛
CRF Present Annuity (𝐴Τ𝑃 , 𝑖, 𝑛)
1+𝑖 𝑛 −1
SUMMARY

1+𝑖 𝑛 −1
SPWF Annuity Present (𝑃Τ𝐴 , 𝑖, 𝑛)
𝑖 1+𝑖 𝑛
SUMMARY
CAF Present Future (1 + 𝑖)𝑛 (𝐹 Τ𝑃 , 𝑖, 𝑛)
PWF Future Present 1 + 𝑖 −𝑛 (𝑃Τ𝐹 , 𝑖, 𝑛)
𝑖
SFF Future Annuity 𝑛 (𝐴Τ𝐹 , 𝑖, 𝑛)
1+𝑖 −1
1+𝑖 𝑛 −1
USCAF Annuity Future (𝐹 Τ𝐴 , 𝑖, 𝑛)
𝑖
𝑖 1+𝑖 𝑛
CRF Present Annuity (𝐴Τ𝑃 , 𝑖, 𝑛)
1+𝑖 𝑛 −1
1+𝑖 𝑛 −1
SPWF Annuity Present (𝑃Τ𝐴 , 𝑖, 𝑛)
𝑖 1+𝑖 𝑛
ROR
Rate of return can also be used to determine the worth
of an investment aside from using the present worth,
annual worth and future worth analyses.
ROR Analysis
In the view of rate-of-return analysis, there will be four
aspects to be discussed:
(1) concept of the return on investment;
(2) calculations of the rate-of-return;
(3) development of internal rate-of-return;
(4) comparison of mutually exclusive projects
Return on Investment
Return on investment is also called as ROI which
defines as the rate of return of the interest earned on
the unpaid balance from an investment.
EXAMPLE 1
What is interest rate of a private lending company that
lends Php 10,000.00 which will be repaid after three
years amounting to Php 17,280.00?
EXAMPLE 1
𝑃 = 𝐹 (𝑃Τ𝐹 , 𝑖, 𝑛)
10,000.00 = 17,280.00 (𝑃Τ𝐹 , 𝑖, 3)
𝑖 = 20%

The private lending company will earn a return of 20%

from the Php 10,000.00 investment.
EXAMPLE 1

Unpaid Balance at
Return on Unpaid Unpaid Balance at
Year the Beginning Payment Received
Balance the Ending Year
Year

3
EXAMPLE 1

Unpaid Balance at
Return on Unpaid Unpaid Balance at
Year the Beginning Payment Received
Balance the Ending Year
Year

0 - 10,000.00

1 - 10,000.00 - 2,000.00 0.00 - 12,000.00

2 - 12,000.00 - 2,400.00 0.00 - 14,400.00

3 - 14,400.00 - 2,880.00 17,280.00 0.00

Return on Investment
Rate of return is the break-even interest rate, 𝑖 ∗ , at which
the present worth of a project is zero.
EXAMPLE 1
𝑃𝑊 = 𝐼𝐶 + 𝐹𝑊
𝑃𝑊 = −10,000.00 + 17,280.00 (𝑃Τ𝐹 , 20%, 3)
𝑃𝑊 = 0

When the present worth becomes 0, it indicates that

private lending company can break even at 20% rate of
interest.
ROR
𝑃𝑊 𝑖 ∗ = 𝑃𝑊𝑖𝑛𝑓𝑙𝑜𝑤𝑠 + 𝑃𝑊𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 = 0
𝑃𝑊 𝑖 ∗ = 𝐴 (𝑃Τ𝐴 , 𝑖 ∗ , 𝑛) = 0
𝑃𝑊 𝑖 ∗ = 𝐹 (𝑃Τ𝐹 , 𝑖 ∗ , 𝑛) = 0

Hence, the 𝑖 ∗ of any investment opportunities can be

defined as the rate of interest that equates the present
worth, annual worth and future worth of the entire cash
flows to zero.
Return on Invested Capital
Return on invested capital can be evaluated using a
project investment in which its return is also referred to
IRR (internal rate of return).
Internal Rate of Return
The IRR is the interest rate charged on the unrecovered
project balance of any investment opportunity on which
when the project terminates, the unrecovered balance is
zero.
EXAMPLE 2
What is the IRR of a private company that invests Php
10,000.00 to an investment that earns Php 4,747.25
annually for three years?
EXAMPLE 2
𝑃 = 𝐴 (𝑃Τ𝐴 , 𝑖, 𝑛)
10,000.00 = 4,747.25 (𝑃Τ𝐴 , 𝑖, 3)
𝑖 = 20%

The private company will earn a return of 20% from the

Php 10,000.00 investment that returns Php 4,747.25 for
three years.
EXAMPLE 2

Unpaid Balance at
Return on Unpaid Unpaid Balance at
Year the Beginning Payment Received
Balance the Ending Year
Year

3
EXAMPLE 2

Unpaid Balance at
Return on Unpaid Unpaid Balance at
Year the Beginning Payment Received
Balance the Ending Year
Year

0 - 10,000.00 0 0 - 10,000.00

1 - 10,000.00 - 2,000.00 4,747.25 - 7,252.75

2 - 7,252.75 - 1,450.55 4,747.25 - 3,956.05

3 - 3,956.05 - 791.21 4,747.25 0.00

EXAMPLE 2
Based on the table, the remaining balance on its first year
earns an interest. The remaining balance on the second
year and third year also earn an interest.
This indicates that the private company earns a 20% rate
of return on the funds internally on the invested project.
This means that the investment project earns enough
money to pay for itself for three years and to provide the
investor, private company, a return of 20% on the invested
capital.
EXAMPLE 3
You are considering two investment opportunities. The
first project is to invest today your Php 10,000.00 with a
return of Php 15,000.00 after four years. The second
project is to invest Php 20,000.00 today with an annual
return of Php 11,600.00 for two years.
EXAMPLE 3
Project A: PW 𝑖 ∗ = −𝑃𝑊 + 𝐹𝑊
PW 𝑖 ∗ = −10,000.00 + 15,000.00 (𝑃Τ𝐹 , 𝑖 ∗ , 4)
0 = −10,000.00 + 15,000.00 (𝑃Τ𝐹 , 𝑖 ∗ , 4)
𝑖 ∗ = 10.67%
EXAMPLE 3
Project B: PW 𝑖 ∗ = 𝐴 (𝑃Τ𝐴 , 𝑖 ∗ , 𝑛)
PW 𝑖 ∗ = −20,000.00 + 11,600.00 (𝑃Τ𝐴 , 𝑖 ∗ , 2)
0 = −20,000.00 + 11,600.00 (𝑃Τ𝐴 , 𝑖 ∗ , 2)
𝑖 ∗ = 10.49%
EXAMPLE 4
You are considering to buy a cheap car worth of Php
500,000.00 and at the same time you are also planning
to use it for rental service for five years that can earn
Php 160,000.00 in a year. What is the IRR of this
project?
EXAMPLE 4

𝐴 1+𝑖 𝑛−1
𝑃=
𝑖(1 + 𝑖)𝑛
𝑃𝑊 𝑜𝑓 𝐼𝐶 = 500,000.00
𝑃𝑊 𝑜𝑓 𝑅𝑆 = 160,000.00 (𝑃Τ𝐴 , 𝑖, 𝑛)

𝑃𝑊 𝑜𝑓 𝐼𝐶 = 𝑃𝑊 𝑜𝑓 𝑅𝑆
𝑃Τ𝐴 , 𝑖, 𝑛 = 500,000.00/160,000.00
𝑃Τ𝐴 , 𝑖, 𝑛 = 3.125
EXAMPLE 4

Using the interest factor table:

𝑃Τ𝐴 , 15%, 5 = 3.3522

𝑃Τ𝐴 , 20%, 5 = 2.9906

𝐼𝑅𝑅 = 15% + 5% (3.125 − 3.3522)/(2.9906 − 3.3522)

𝐼𝑅𝑅 = 18.14%
EXAMPLE 4

𝑃 𝑖 (1 + 𝑖)𝑛
𝐴=
1+𝑖 𝑛−1
𝑃𝑊 𝑜𝑓 𝐼𝐶 = 500,000.00(𝐴Τ𝑃 , 𝑖, 𝑛)
𝑃𝑊 𝑜𝑓 𝑅𝑆 = 160,000.00

𝐴𝑊 𝑜𝑓 𝐼𝐶 = 𝐴𝑊 𝑜𝑓 𝑅𝑆
𝐴Τ𝑃 , 𝑖, 𝑛 = 160,000.00/500,000.00
𝐴Τ𝑃 , 𝑖, 𝑛 = 0.32
EXAMPLE 4

Using the interest factor table:

𝐴Τ𝑃 , 15%, 5 = 0.29832

𝐴Τ𝑃 , 20%, 5 = 0.33438

𝐼𝑅𝑅
= 15% + 5% (0.32 − 0.29832)/(0.33438 − 0.29832)
𝐼𝑅𝑅 = 18.01%
ROR VS MARR
𝑖 ∗ > 𝑀𝐴𝑅𝑅 economically acceptable
𝑖 ∗ < 𝑀𝐴𝑅𝑅 economically unacceptable
𝑖 ∗ = 𝑀𝐴𝑅𝑅 economically acceptable
EXAMPLE 1
A project has an initial investment of Php 100,000.00
with annual return of Php 30,000.00 every year for five
years.
(a) Determine the rate of return of this project using
trial and error method.
(b) If MARR is set to 10%, does it make this project
economically acceptable or not?
EXAMPLE 1

𝑃𝑊 𝑖 ∗ = 𝑃𝑊 + 𝐴𝑊
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −100,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 5)
𝑃𝑊 𝑖 ∗ = −100,000.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 5)
0 = −100,000.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 5)
𝑃Τ𝐴 , 𝑖 ∗ , 5 = 3.3333
EXAMPLE 1

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 5 = 3.3333
𝑃Τ𝐴 , 15%, 5 = 3.3522
𝑃Τ𝐴 , 20%, 5 = 2.9906

∗
3.3333 − 3.3522
𝑖 = 15% + 20% − 15%
2.9906 − 3.3522
𝑖 ∗ = 15.2613%
EXAMPLE 1

Let’s compare the value of 𝑖 ∗ to MARR:

𝑖 ∗ = 15.2613%
MARR = 10%
Since 𝑖 ∗ > MARR, the given project is economically
acceptable.
EXAMPLE 2
A project has an initial investment of Php 100,000.00
with annual return of Php 30,000.00 every year for
fifteen years.
(a) Determine the rate of return of this project using
trial and error method.
(b) If MARR is set to 30%, does it make this project
economically acceptable or not?
EXAMPLE 2

𝑃𝑊 𝑖 ∗ = 𝑃𝑊 + 𝐴𝑊
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −100,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 15)
𝑃𝑊 𝑖 ∗ = −100,000.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 15)
0 = −100,000.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 15)
𝑃Τ𝐴 , 𝑖 ∗ , 15 = 3.3333
EXAMPLE 2

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 15 = 3.3333
𝑃Τ𝐴 , 25%, 15 = 3.8593
𝑃Τ𝐴 , 30%, 15 = 3.2682

∗
3.3333 − 3.8593
𝑖 = 25% + 30% − 25%
3.2682 − 3.8593
𝑖 ∗ = 29.4493%
EXAMPLE 2

Let’s compare the value of 𝑖 ∗ to MARR:

𝑖 ∗ = 29.4493%
MARR = 30%
Since 𝑖 ∗ < MARR, the given project is economically
unacceptable.
EXAMPLE 3
A project has an initial investment of Php 43,000.00 with
annual return of Php 30,000.00 every year for only two
years.
(a) Determine the rate of return of this project using
direct method.
(b) If MARR is set to 25%, does it make this project
economically acceptable or not?
EXAMPLE 3

𝑃𝑊 𝑖 ∗ = 𝑃𝑊 + 𝐴𝑊
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −43,200.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 2)
𝑃𝑊 𝑖 ∗ = −43,200.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 2)
0 = −43,200.00 + 30,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 2)
𝑖 ∗ = 25%
EXAMPLE 3

Let’s compare the value of 𝑖 ∗ to MARR:

𝑖 ∗ = 25%
MARR = 25%
Since 𝑖 ∗ = MARR, the given project is economically
acceptable.
EXAMPLE 4
Determine the rate of return of an investment
opportunity that has an initial investment capital of Php
2,000,000.00 with annual return of Php 350,000.00 every
year for ten years. Use the trial and error method.
EXAMPLE 4

𝐴𝑊 𝑖 ∗ = 𝑃𝑊 + 𝐴𝑊
𝐴𝑊 𝑜𝑓 𝐼𝐶 = −2,000,000.00 (𝐴Τ𝑃 , 𝑖 ∗ , 10)
𝐴𝑊 𝑜𝑓 𝐴𝑅 = 350,000.00
𝐴𝑊 𝑖 ∗ = −2,000,000.00 𝐴Τ𝑃 , 𝑖 ∗ , 10 + 350,000.00
0 = −2,000,000.00 𝐴Τ𝑃 , 𝑖 ∗ , 10 + 350,000.00
𝐴Τ𝑃 , 𝑖 ∗ , 10 = 0.175
EXAMPLE 4

Using the interest table:

𝐴Τ𝑃 , 𝑖 ∗ , 10 = 0.17500
𝐴Τ𝑃 , 11%, 10 = 0.16980
𝐴Τ𝑃 , 12%, 10 = 0.17698
∗
0.17500 − 0.16980
𝑖 = 11% + 12% − 11%
0.17698 − 0.16980
𝑖 ∗ = 11.72%
EXAMPLE 5
Three independent investment opportunities are being
considered for the source of energy. The set MARR is
27% for 6 years. Find the best alternative using ROR.

Investment Opportunities Initial Cost Annual Revenue

A 200,000.00 70,000.00
B 250,000.00 90,000.00
C 150,000.00 60,000.00
EXAMPLE 5

Project A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −200,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 70,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 6)
𝑃𝑊 𝑖 ∗ = −200,000.00 + 70,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
0 = −200,000.00 + 70,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.8571
EXAMPLE 5

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.8571
𝑃Τ𝐴 , 25%, 6 = 2.9514
𝑃Τ𝐴 , 30%, 6 = 2.6427

∗
2.8571 − 2.9514
𝑖 = 25% + 30% − 25%
2.6427 − 2.9514
𝑖 ∗ = 26.53%
EXAMPLE 5

Project B: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −250,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 90,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 6)
𝑃𝑊 𝑖 ∗ = −250,000.00 + 90,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
0 = −250,000.00 + 90,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.7778
EXAMPLE 5

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.7778
𝑃Τ𝐴 , 25%, 6 = 2.9514
𝑃Τ𝐴 , 30%, 6 = 2.6427

∗
2.7778 − 2.9514
𝑖 = 25% + 30% − 25%
2.6427 − 2.9514
𝑖 ∗ = 27.81%
EXAMPLE 5

Project C: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −150,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 60,000.00 (𝑃Τ𝐴 , 𝑖 ∗ , 6)
𝑃𝑊 𝑖 ∗ = −150,000.00 + 60,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
0 = −150,000.00 + 60,000.00 𝑃Τ𝐴 , 𝑖 ∗ , 6
𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.5
EXAMPLE 5

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 6 = 2.5
𝑃Τ𝐴 , 30%, 6 = 2.6427
𝑃Τ𝐴 , 40%, 6 = 2.1680

∗
2.5000 − 2.6427
𝑖 = 30% + 40% − 30%
2.1680 − 2.6427
𝑖 ∗ = 33%
EXAMPLE 5

Investment Annual
Initial Cost ROR
Opportunities Revenue
A 200,000.00 70,000.00 26.53%
B 250,000.00 90,000.00 27.81%
C 150,000.00 60,000.00 33%

Among the three investment opportunities, only B and C

are qualified for consideration since the set MARR is
27% but C > B, so C should be the pursued project.
EXAMPLE 6
Four projects are being considered with MARR set at
19% for 10 years. Find the best independent using ROR.

Investment Opportunities Initial Cost Annual Revenue

A 10,000.00 2,500.00
B 15,000.00 3,400.00
C 20,000.00 4,600.00
D 25,500.00 5,500.00
EXAMPLE 6

Project A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −10,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 2,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃𝑊 𝑖 ∗ = −10,000.00 + 2,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
0 = −10,000.00 + 2,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4
EXAMPLE 6

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4
𝑃Τ𝐴 , 20%, 10 = 4.1925
𝑃Τ𝐴 , 25%, 10 = 3.5705

∗
4.0000 − 4.1925
𝑖 = 20% + 25% − 20%
3.5705 − 4.1925
𝑖 ∗ = 21.55%
EXAMPLE 6

Project B: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −15,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 3,400.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃𝑊 𝑖 ∗ = −15,000.00 + 3,400.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
0 = −15,000.00 + 3,400.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.4118
EXAMPLE 6

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.4418
𝑃Τ𝐴 , 15%, 10 = 5.0188
𝑃Τ𝐴 , 20%, 10 = 4.1925

∗
4.4418 − 5.0188
𝑖 = 15% + 20% − 15%
4.1925 − 5.0188
𝑖 ∗ = 18.49%
EXAMPLE 6

Project C: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −20,000.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 4,600.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃𝑊 𝑖 ∗ = −20,000.00 + 4,600.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
0 = −20,000.00 + 4,600.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.3478
EXAMPLE 6

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.3478
𝑃Τ𝐴 , 15%, 10 = 5.0188
𝑃Τ𝐴 , 20%, 10 = 4.1925

∗
4.3478 − 5.0188
𝑖 = 15% + 20% − 15%
4.1925 − 5.0188
𝑖 ∗ = 19.06%
EXAMPLE 6

Project D: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 𝑜𝑓 𝐼𝐶 = −25,500.00
𝑃𝑊 𝑜𝑓 𝐴𝑅 = 5,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃𝑊 𝑖 ∗ = −25,500.00 + 5,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
0 = −25,500.00 + 5,500.00 (𝑃Τ𝐴 , 𝑖 ∗ , 10)
𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.6364
EXAMPLE 6

Using the interest table:

𝑃Τ𝐴 , 𝑖 ∗ , 10 = 4.6364
𝑃Τ𝐴 , 15%, 10 = 5.0188
𝑃Τ𝐴 , 20%, 10 = 4.1925

∗
4.6364 − 5.0188
𝑖 = 15% + 20% − 15%
4.1925 − 5.0188
𝑖 ∗ = 17.31%
EXAMPLE 6
Investment Annual
Initial Cost ROR
Opportunities Revenue
A 10,000.00 2,500.00 21.55%
B 15,000.00 3,400.00 18.49%
C 20,000.00 4,600.00 19.06%
D 25,500.00 5,500.00 17.31%
EXAMPLE 7
Four mutually exclusive projects are being considered
with MARR set at 15% for 10 years. Which alternative
should be chosen?

Investment Opportunities Initial Cost Annual Revenue

A 10,000.00 2,500.00
B 15,000.00 3,400.00
EXAMPLE 7

Project B to A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐵−𝐴 = −15,000.00 − −10,000 = −5,000.00
∆𝐴𝑅𝐵−𝐴 = 3,400.00 − 2,500.00 = 900.00
𝑃𝑊 ∆𝑖 ∗ = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 12.41%
EXAMPLE 7

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ 𝐵−𝐴 = 12.41%
MARR = 15%
The return of project B does not exceed the set MARR
which is 15%, we have to eliminate project B and have to
choose project A.
EXAMPLE 8

Investment Opportunities Initial Cost Annual Revenue

A 10,000.00 2,500.00
B 15,000.00 3,400.00
C 20,000.00 4,600.00

Which project should be pursued?

MARR is set at 15% for 10 years.
EXAMPLE 8

Project B to A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐵−𝐴 = −15,000.00 − −10,000 = −5,000.00
∆𝐴𝑅𝐵−𝐴 = 3,400.00 − 2,500.00 = 900.00
𝑃𝑊 ∆𝑖 ∗ = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 12.41%
EXAMPLE 8

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ = 20.18%
MARR = 15%
We have to eliminate project B since its return does not
exceed the set MARR. Only project A and project C can
compete with the investment selection.
EXAMPLE 8

Project C to A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐶−𝐴 = −20,000.00 − −10,000 = −10,000.00
∆𝐴𝑅𝐶−𝐴 = 4,600.00 − 2,500.00 = 2,100.00
𝑃𝑊 ∆𝑖 ∗ = −10,000.00 + 2,100.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −10,000.00 + 2,100.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 16.40%
EXAMPLE 8

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ 𝐶−𝐴 = 16.40%
MARR = 15%
We have to keep project A since its return exceeds the
set MARR. Since, there is no more alternative to be
compared to project C, we have to select project as the
best overall alternative.
EXAMPLE 9

Investment Opportunities Initial Cost Annual Revenue

A 10,000.00 2,500.00
B 15,000.00 3,400.00
C 20,000.00 4,600.00
D 25,500.00 5,500.00

Which project should be pursued?

MARR is set at 15% for 10 years.
EXAMPLE 8

Project B to A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐵−𝐴 = −15,000.00 − −10,000 = −5,000.00
∆𝐴𝑅𝐵−𝐴 = 3,400.00 − 2,500.00 = 900.00
𝑃𝑊 ∆𝑖 ∗ = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −5,000.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 12.41%
EXAMPLE 8

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ 𝐵−𝐴 = 12.41%
MARR = 15%
We have to eliminate project B since its return does not
exceed the set MARR. Only project A, project C and
project D can compete with the investment selection.
EXAMPLE 8

Project C to A: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐶−𝐴 = −20,000.00 − −10,000 = −10,000.00
∆𝐴𝑅𝐶−𝐴 = 4,600.00 − 2,500.00 = 2,100.00
𝑃𝑊 ∆𝑖 ∗ = −10,000.00 + 2,100.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −10,000.00 + 2,100.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 16.40%
EXAMPLE 8

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ 𝐶−𝐴 = 16.40%
MARR = 15%
We have to keep project C since its return exceeds the
set MARR and eliminate project A. Only project C and
project D can compete with the investment selection.
EXAMPLE 8

Project D to C: 𝑃𝑊 𝑖 ∗ = 𝐼𝐶 + 𝐴𝑅
∆𝐼𝐶𝐷−𝐶 = 25,500.00 − −20,000 = −5,500.00
∆𝐴𝑅𝐷−𝐶 = 5,500 − 4,600.00 = 900.00
𝑃𝑊 ∆𝑖 ∗ = −5,500.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
0 = −5,500.00 + 900.00 (𝑃Τ𝐴 , ∆𝑖 ∗ , 10)
∆𝑖 ∗ = 10.13%
EXAMPLE 8

Let’s compare the value of 𝑖 ∗ to MARR:

∆𝑖 ∗ 𝐷−𝐶 = 10.13%
MARR = 15%
We have to eliminate project D since its return does not
exceed the set MARR. Since, there is no more alternative
to be compared to project C, we have to select project
as the best overall alternative.
 END OF
PRESENTATION
 FAITH COLLEGES
COLLEGE OF ENGINEERING

ENGINEERING ECONOMICS
SUMMER 2020-2021

ENGR. KENT PATRICK FERRARO