Blank 3e ISM Ch06

Solutions to end-of-chapter problems
Basics of Engineering Economy, 3rd edition

Leland Blank and Anthony Tarquin
Chapter 6
Rate of Return Analysis
6.1 What does a rate of return of −100% mean?
A rate of return of −100% means that the entire investment is lost.
6.2 A $10,000 loan amortized over 5 years at an interest rate of 10% per year would
require payments of $2638 to completely extinguish the loan when interest is
charged on the unrecovered balance. If interest is charged on the principal instead of
the unrecovered balance, what would be the balance after 5 years if the same $2638
payments are made each year?
Total interest paid = 10,000(0.10)(5)

= $5,000
Total due = 10,000 + 5,000
= $15,000
Total payments = 5(2638)
= $13,190
Balance = 15,000 – 13,190
= $1810
6.3 A-1 Mortgage makes loans with the interest charged on the loan principal rather than
on the unpaid balance. For a 4-year loan of $10,000 at 10% per year, what equal
annual payment would be required to complete repayment of the loan in 4 years, if
interest is charged on (a) the principal and (b) the unrecovered balance?
(a) Annual payment = [10,000/4 + 10,000(0.10)]

= $3500
(b) A = 10,000(A/P,10%,4)
= 10,000(0.31547)
= $3154.70
6.4 Spectra Scientific of Santa Clara, California, manufactures Q-switched solid-state

industrial lasers for LED substrate scribing and silicon wafer dicing. The company
got a $60 million loan, amortized over a 5-year period at 8% per year interest. What
is the amount of the unrecovered balance (a) immediately before the payment is
made at the end of year 1, and (b) immediately after the first payment?
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(a) Balance before payment = 60,000,000(1.08)
= $64,800,000
Annual payment = 60,000,000(A/P,8%,5)

= 60,000,000(0.25046)
= $15,027,600
Balance after payment = 64,800,000 – 15,027,600

= $49,772,400
6.5 You and three college buddies have formed a company, Right For You, Inc., that
will customize off-the-shelf marketing software locally rather than contracting with
the original development company or a large, nationally based customizer. The
target clients are bricks-and-mortar merchants and smaller e-commerce businesses.
Because of your unique approach to this type of software tailoring, a venture
capitalist group (individuals or companies that invest in innovative start-ups at low
rates and a percentage of the business for the future) has agreed to invest in your
start-up with $1 million to be recovered from business proceeds at a low interest rate
of 3% per year over a 4-year period, and a 15% share in Right For You. During the
negotiations with the venture capitalist, you did not ask about the basis of the 3%
interest. To help your partners understand the finances, determine the following:
a. The minimum revenue needed to recover the $1 million investment and earn the
3% per year during the life of the loan.
b. The difference in the equal annual payments if loan interest is charged on the
principal rather than on the unpaid balance.
c. The difference in the unpaid balance immediately after the first payment, i.e., end
of year 1, if loan interest is charged on the principal rather than on the unpaid
balance.
(a) This the capital recovery amount at 3%.
CR = 1,000,000(A/P,3%,4) = $269,030
(b) For interest on principal, interest and payment are:
Interest each year: 0.03(1,000,000) = $30,000

Payment each year: 1,000,000/4 + 30,000 = $280,000
For unrecovered balance, annual payment is:

Payment each year = 1,000,000(A/P,3%,4)
= 1,000,000(0.26903)
= $269,030
This is the same as the CR calculated above.
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Difference = 280,000 – 269,030
= $10,970 per year more for principal-based interest
(c) For interest on principal:
Balance after first payment = 1,000,000 + 1,000,000(0.03) – 280,000

= $750,000
For unrecovered balance:
Balance after first payment = 1,000,000 + 1,000,000(0.03) – 269,030

= $760,970
Difference = 769,970 – 750,000

= $19,970 higher on unrecovered balance-based interest
6.6 At the International Conference on Robotics and Automation, a robot was unveiled
by a team of young engineers that would help people who needed daily physical
assistance getting dressed. The team used haptics as the sensorial method for training
the robot. In order to improve its performance, the team was seeking a loan of
$1,000,000 that they would repay in 5 years. A wealthy entrepreneur offered two
options for the $1 million loan. Plan A was a 10% loan with interest charged on the
$1 million principal of the loan. Plan B was a 14% loan with interest charged on the
unpaid balance. Which plan would result in higher total interest paid and by how
much?
For interest on principal:
Interest each year is 0.10(1,000,000) = $100,000

Total interest paid = 100,000(5) = $500,000
For unrecovered balance:
Payment each year = 1,000,000(A/P,14%,5)

= 1,000,000(0.29128)
= $291,280
Total interest paid = 291,280(5) – 1,000,000

= $456,400
Difference = 500,000 – 456,400

= $43,600 more interest on 10% principal-based loan
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6.7 A powerful set of “glasses,” called eSight, can give sight to the legally blind by
using high-definition video, magnification, contrast, and propriety algorithms to
enhance imagery into something they can see. The cost of the device is $9995. If the
company that makes the device spent $1.9 million to develop it, what rate of return
will the company make over a 5-year planning period if it sells 200 devices each
year at a profit of $2500 per device?
Factors: 2500(200) = 1,900,000(A/P,i*,5)

(A/P,i*,5) = 0.26316
From tables, i* is between 9% and 10%; close to 10% per year
Spreadsheet: Using = RATE(5,2500*200,−1900000) display an i* of 9.91% per year
6.8 (a) Use tabulated factors and a spreadsheet function to determine the interest rate per
period for the following rate of return equation. (b) Is it possible to use the RATE
function to find i*? Why?
0 = −35,000 + 9000(P∕A,i*,5) + 8000(P∕F,i*,8).
(a) Factors: PW relation 0 = − 35,000 + 9000(P/A,i*,5) + 8000(P/F,i*,8)
Try 12%: − 35,000 + 9000(3.6048) + 8000(0.4039) = $674.40 > 0 too low

Try 14%: − 35,000 + 9000(3.4331) + 8000(0.3506) = $−1,297.30 < 0 too high
Interpolation yields i* = 12.68% per period
Spreadsheet: Enter cash flows in cells B1:B9, with zeros in B7 and B8

Function = IRR(B1:B9) display an i* of 12.66%
(b) No, because the $8000 future value is in year 8, not year 5. This does not fit the
format required for the RATE function. Must use the IRR function.
6.9 Xavier looked at his company’s cash flows for the recent past on a newly offered
home delivery service of pet food and supplies. He wants to know the rate of return
per month if $149,333 was invested in a project with monthly costs of $28,500 and
income of $34,500 over a 2½-year period. (a) Determine the monthly i* for him. (b)
Determine his effective annual rate if monthly compounding is assumed.
(a) 0 = −149,333 + (34,500 – 28,500)(P/A,i*,30)

(P/A,i*,30) = 24.8888
i* = 1.25% per month
(b) Nominal per year = 1.25(12) = 15%

Using Equation [3.2] or Table 3.3
Effective i* = (1 + 0.15/12)12 – 1 = 0.1608 (16.08% per year)
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6.10 Determine the rate of return per year for the cash flows shown below. Use (a)
tabulated factors, and (b) a spreadsheet.
Year 0 1 2 3
Cash Flow, $ −125,000 −7,500 84,000 78,000
(a) Factors: Move all cash flows to year 0. In $1000 units,
0 = −125 – 7.5(P/F,i*,1) + 84(P/F,i*,2) + 78(P/F,i*,3)
Try 8%: −125 – 7.5(0.9259) + 84(0.8573) + 78(0.7938) = $1985.35 > 0 too low
Try 9%: −125 – 7.5(0.9174) + 84(0.8417) + 78(0.7722) = $−946.10 < 0 too high
Interpolation yields i* = 8.68% per year
(b) Spreadsheet: Enter cash flows for years 0 to 3 in cells B1:B4
Function: = IRR(B1:B4) displays an i* of 8.67%
6.11 Chemco Enterprises is the manufacturer of Ultra-Dry, a hydrophobic coating that

will waterproof anything. Over a 5-year period, the costs associated with the pilot
test product line were as follows: first cost of $30,000 and annual costs of $18,000.
Annual revenue was $27,000 and used equipment was salvaged for $4000. What
rate of return did the company make on this product?
0 = −30,000 + (27,000 – 18,000)(P/A,i%,5) + 4000(P/F,i%,5)
By trial and error in factor tables, interpolate between 16% and 20%.
By the function = RATE(5,27−18,−30,4), i* = 17.85 %
6.12 A graduate of NMSU who started a successful business wanted to start an

endowment in her name that would provide scholarships to students with
entrepreneurial interests. She wanted the scholarships to amount to $10,000 per
year and she wanted the first one to be given on the day she made the donation. If
she planned to donate $100,000, what rate of return will the university have to make
to award the $10,000 per year scholarships forever?
(100,000 – 10,000)i* = 10,000

i* = 11.1%
6.13 PPG manufactures an epoxy amine that is used to protect the contents of
polyethylene terephthalate (PET) containers from reacting with oxygen. The cash
flows (in $ millions) associated with the process are shown below. Determine the
rate of return using (a) tabulated factors, and (b) a spreadsheet. (c) (Spreadsheet
exercise) Demonstrate the use of GOAL SEEK to find i* if the IRR function were
not available.
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Year Cost, $ Revenue, $
0 −10 —
1 −4 2
2 −4 3
3 −4 9
4 −3 9
5 −3 9
6 −3 9
(a) Factors: PW relation

0 = −10 – 4(P/A,i*,3) − 3(P/A,i*,3)(P/F,i*,3) + 2(P/F,i*,1)
+ 3(P/F,i*,2) + 9(P/A,i*,4)(P/F,i*,2)
Try 14%: $0.25 > 0 too low

Try 16%: $−0.63 < 0 too high
By interpolation, i* = 14.57%
(b) Spreadsheet: Using = IRR(B2:B8) the display is an i* of 14.55 %
(c) Develop NPV function with trail i* in cell C12. Use GOAL SEEK to change C12
such that cell D12 is 0.00. Display is an i* of 14.55%.
6.14 A 473-foot, 7000-ton World War II troop carrier (once commissioned as the SS
Excambion) was sunk in the Gulf of Mexico to serve as an underwater habitat and
diving destination. The project took 10 years of planning and cost $4 million, which
was spent equally at $400,000 in years 1 through 10. Fishing and recreation
activities, estimated at $270,000 per year, will begin in year 11 and are expected to
continue in perpetuity. Determine the rate of return on the venture using
(a) tabulated factors, and (b) the GOAL SEEK tool.
(a) Tabulated factors; Move all amounts to year 10.
0 = −400,000(F/A,i*,10) + 270,000/i*
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Try 5%: −400,000(12.5779) + 270,000/0.05 = $368,840 > 0 too low
Try 6%: −400,000(13.1808) + 270,000/0.06 = $−772,320 < 0 too high
Interpolation yields i* = 5.32%
(b) Solve for i* by spreadsheet using the FV function and GOAL SEEK. For
example, place a guess i* in cell B1and set up the single-cell function. GOAL
SEEK forces the FV function to 0.00 by changing cell B1.
= −FV($B$1,10,−400000) + 270000/$B$1
Display is i* = 5.29% per year
6.15 Steel cable barriers in highway medians are a low-cost way to improve traffic safety
without busting state department of transportation budgets. Cable barriers cost
$44,000 per mile, compared with $72,000 per mile for guardrail and $419,000 per
mile for concrete barriers. Furthermore, cable barriers tend to snag tractor-trailer
rigs, keeping them from ricocheting back into same-direction traffic. The state of
Ohio spent $4.97 million installing 113 miles of cable barriers.
a. If the cables prevent accidents totaling $1.3 million per year, determine the rate
of return that this represents over a 10-year study period. Use tabulated factors, a
calculator, and a spreadsheet.
b. Determine the rate of return for 113 miles of guardrail if accident prevention is
$1.1 million per year over a 10-year study period. To do so, first write the ROR
relation and then find i* using a single-cell spreadsheet function.
(a) All monetary values in $ million units
Factors: 0 = −4.97 + 1.3(P/A,i*,10)
(P/A,i*,10) = 3.8231
Interpolation between 22% and 24% yields i* = 22.83%
Calculator: Function i(10,1.3,−4.97,0) displays an i* of 22.80%
Spreadsheet: Function = RATE(10,1.3,−4.97) displays an i* of 22.80%
(b) Cost of guardrail = 72,000(113) = $8.136 million
ROR relation: 0 = −8.136 + 1.1(P/A,i*,10)
(P/A,i*,10) = 7.39636
Spreadsheet function = RATE(10,1100000,−72000*113) displays an i* of 5.9%
6.16 Techstreet.com is a small web design business that provides services for two main
types of websites: brochure sites and e-commerce sites. One package involves an
up-front payment of $90,000 and monthly payments of 1.4¢ per “hit.” Kathy Cutler
has a new eBay franchise and is considering the e-commerce package. She expects
to have at least 6000 hits per month, and hopes that 1.5% of the hits will result in a
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sale. If the average income from sales (after fees and expenses) is $150, what rate
of return per month will Kathy realize if she uses the website for 2 years?
0 = −90,000(A/P,i*,24) – 0.014(6000) + 0.015(6000)(150)

0 = −90,000(A/P,i*,24) + 13,416
(A/P,i*,24) = 0.15093
Factors: Solve by trial and error; interpolate between, say, 12% and 15%
Spreadsheet: = RATE(24,13416,−90000) displays an i* of 14.30% per month
6.17 On the advice of your uncle, you purchased 10 shares of a well-established U.S.-
based corporate stock for $20.50 per share. After 1 quarter, you received $0.25 per
share dividends each quarter for 2 years. At that point, the stock price had gone
down in a short-term recession, so you purchased 10 more shares at $14.00 per
share. The stock continued to pay 25¢ per share on all 20 shares. After 3 years (12
quarters) you decided to sell the stock since it had increased in market value to
$22.00 per share. Make the following assumptions: (a) no commissions for the
purchase or sale of the stock, (b) no government taxes on the dividends, and (c)
quarterly compounding of the rate of return. Did you realize the anticipated 7% per
year that the stock market historically returns?
Enter cash flows for purchases at $20.50(10) in quarter 0, and $14.00(10) in quarter
8. Dividends are entered each quarter at $0.25 per share. Sale in quarter 12 is
$22.00(20). Use the IRR function to display i* per quarter and EFFECT function to
display the effective i* per year as 16.58%.
Conclusion: You made well above the historic 7% per year return.
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6.18 EV Box is a manufacturer of electric vehicle charging stations and charging
software. The initial cost of one part of their manufacturing process was $130,000
with annual costs of $49,000. Revenues were $78,000 in year 1, increasing by
$1000 per year. A salvage value of $23,000 was realized when the process was
discontinued after 8 years. Using a spreadsheet (or factors, as instructed) determine
the rate of return the company made on the process.
0 = −130,000 + (78,000 – 49,000)(P/A,i*,8) + 1000(P/G,i*,8) + 23,000(P/F,i*,8)
Factors: Try at 15%: $20,132 > 0 too low

Try at 20%: $−3,490 < 0 too high
Interpolation results in i* ≈ 19.3%
Spreadsheet: Use the IRR function to display an i* of 19.17%
6.19 When evaluating two alternatives by the rate of return method, if alternative A has a
rate of return of 10% and alternative B has a rate of return of 18%, what is known
about the rate of return on the increment between A and B if the investment
required in B is (a) larger than that required for A, and (b) smaller than that
required for A?
(a) The rate of return on the increment has to be larger than 18%.
(b) The rate of return on the increment has to be smaller than 10%.
6.20 Determine the overall rate of return on a $150,000 investment that returns 15% on
the first $50,000 and 25% on the remaining $100,000.
Overall ROR = [50,000(0.15) + 100,000(0.25)]/150,000

= 1/3(0.15) + 2/3(0.25)
= 0.2167 (21.67%)
6.21 For each of the following scenarios, state whether an incremental investment
analysis is required to select alternative X or Y, and state why or why not. Assume
that alternative Y requires a higher initial investment than X and that the MARR is
19% per year.
a. X has an ROR of 28% per year and Y has an ROR of 19% per year.
b. X has an ROR of 18% per year and Y has an ROR of 23% per year.
c. X has an ROR of 16% per year and Y has an ROR of 19% per year.
d. X has an ROR of 30% per year and Y has an ROR of 23% per year.
e. X has an ROR of 21% per year and Y has an ROR of 22% per year.
f. X has an ROR of 18% per year and Y has an ROR of 17% per year.
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Answers are in table below.
Part Incremental analysis Reason

(a) No Select X; ∆i* < 19%
(b) No Select Y; ∆i* > MARR for Y only
(c) No Select Y; only i* for Y > MARR
(d) Yes Must determine if ∆i* ≥ MARR
(e) No Select Y; ∆i* > 22%
(f) No Neither i* ≥ MARR
6.22 Assume you are the CIO (chief investment officer) for Dragon Industries, LLP
(LLP stands for Limited Liability Partnership). There is $1,000,000 set aside in a
reserve fund to purchase new equipment. If $300,000 is invested at 30%, $200,000
at 25%, and the remaining $500,000 at 20% per year, what is the overall rate of
return on the entire $1,000,000?
Overall ROR = [300,000(0.30) + 200,000(0.25) + 500,000(0.20)]/1,000,000

= 0.24 (24%)
6.23 A total of $50,000 was invested in projects to reduce insider theft in an appliance
warehouse. The two projects, identified as Y and Z, were implemented for 1 year
each. Based on the significantly reduced losses, the overall rate of return on the
$50,000 was determined to be 40%, with the ROR on the $20,000 invested in Y at
15%. (a) What was the size of the investment in Z, and (b) what was the rate of
return on Z?
(a) Size of investment in Z = 50,000 – 20,000

= $30,000
(b) 30,000(RORZ) + 20,000(0.15) = 50,000(0.40)

RORZ = 0.567 (56.7%)
6.24 For the alternatives shown, determine the sum of the incremental cash flows for
Q − P for the LCM of years.
Alternative
P Q
First cost, $ −50,000 −85,000
AOC, $ per year −8,600 −2,000
Annual revenue, $ per year 22,000 45,000
Salvage value, $ 3,000 8,000
Life, years 3 6
10
Year Alternative Q Alternative P Q−P
0 −85,000 −50,000 −35,000
1 43,000 13,400 29,600
2 43,000 13,400 29,600
3 43,000 13,400−50,000+3000 76,600
4 43,000 13,400 29,600
5 43,000 13,400 29,600
6 43,000+8,000 13,400+3,000 34,600
Sum = +194,600
6.25 Two options are available for setting up a wireless meter scanner and controller. A
simple setup is good for 2 years and has an initial cost of $12,000, no salvage value,
and an AOC of $27,000 per year. A more permanent system has a higher first cost
of $73,000, but it has an estimated life of 6 years and a salvage value of $15,000. It
costs only $14,000 per year to operate and maintain. If the two options are
compared using an incremental rate of return, what are the incremental cash flows
in (a) year 0, (b) year 2, and (c) year 6?
(a) Year 0: Incremental CF0 = −73,000 − (−12,000)

= $−61,000
(b) Year 2: Incremental AOC = −14,000 − (−27,000) = $13,000

Incremental re-purchase cost = 0 − (−12,000) = 12,000
Incremental CF2 = 13,000 + 12,000

= $25,000
(c) Year 6: Incremental salvage = 15,000 − 0 = $15,000
Incremental AOC = −14,000 − (−27,000) = $13,000
Incremental CF6 = 15,000 + 13,000

= $28,000
6.26 The tabulation of the incremental cash flows between alternatives A and B is
shown. Alternative A has a 3-year life and alternative B a 6-year life. If neither
alternative has a salvage value, what is the (a) first cost of alternative A and (b) first
cost of alternative B?
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Incremental Cash Flow
Year (B − A), $
0 −20,000
1 5,000
2 5,000
3 12,000
4 5,000
5 5,000
6 5,000
(a) Year 3 incremental CF represents the first cost of A plus the incremental
annual costs of B and A. Let PA be the first cost of A.
First cost of A: 5000 + (0 − PA) = 12,000

PA = $−7000
(b) First cost of B: −20,000 = PB − (−7000)

PB = $−27,000
6.27 Specialty Gases & Chemicals manufactures nitrogen trifluoride, a highly

specialized gas used as an industrial cleansing agent for flat panels installed in
laptop computers, televisions, and desktop monitors. The incremental cash flow
associated with two alternatives for chemical storage and handling systems
(identified as P3 and X3) has been calculated in $1000 units. (a) Determine the rate
of return on the incremental cash flows. (b) If the MARR is 25% per year and X3
requires the larger initial investment, determine if it is justified. Select X3 or P3.
Solve by spreadsheet or factors, as instructed.

Year (X3 – P3), $1000
0 –4600
1–9 1100
10 2000
(a) Factors: 0 = −4600 + 1100(P/A,∆i*,9) +2000(P/F,∆i*,10)
By trial and error, ∆i* = 20.9% per year
Spreadsheet: = RATE(10,1100,−4600,900) displays ∆i* = 20.96%
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(b) Since ∆i* = 20.9% < MARR = 25%, the extra investment in X3 is not justified.
Select alternative P3.
6.28 As groundwater wells age, they sometimes begin to pump sand (and they become
known as “sanders”) and this can cause damage to downstream desalting
equipment. This situation can be dealt with by drilling a new well at a cost of
$1,000,000 or by installing a tank and self-cleaning screen ahead of the desalting
equipment. The tank and screen will cost $230,000 to install and $61,000 per year
to operate and maintain. A new well will have a pump that is more efficient than the
old one and it will require almost no maintenance, so its operating cost will be only
$18,000 per year. The salvage values are estimated to be 10% of the first cost.
Using a present worth ROR relation, a MARR of 6% per year, and a 20-year study
period (a) calculate the incremental rate of return, and (b) determine which
alternative is economically better. (c) (Spreadsheet exercise) Verify your selection
using single-cell spreadsheet functions for an AW analysis of each alternative
separately.
(a) Factors: 0 = −770,000 + 43,000(P/A,∆i*,20) + 77,000(P/F,∆i*,20)
By trial and error, ∆i* = 1.8% per year
Spreadsheet: = RATE(20,43000,−770000,77000) displays a ∆i* of 1.81%
(b) Install the tank and screen, since 1.8% < MARR = 6%
(c) New well: = − PMT(6%,20,−PV(6%,20,−18000,100000) − 1000000)

AW = $−102,466
Tank and screen: = − PMT(6%,20,−PV(6%,20,−61000,23000) − 230000)

AW = $−80,427
Select tank and screen with a smaller AW of costs.
6.29 Harold and Mavone plan to purchase furniture, appliances, some heirloom artifacts,
as well as new woodworking and pottery-making equipment to furnish a renovated
heritage home in Brazos de Dios, Texas, that they have recently purchased. The
hobby equipment is a questionable purchase economically, since the couple plans to
sell their artifacts online for a secondary retirement income. Estimates have been
developed using two vendors for hobby enthusiasts that provide equipment and
marketing services on contract. Note that the vendors’ contract periods vary. If the
hoped-for MARR is 20% per year, determine which vendor, or neither, should be
selected using an incremental ROR analysis. Solve using spreadsheet functions.
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Vendor
Hobby-Tru (H) Knack’s (K)
Initial cost, $ −8,000 −20,500

M&O costs, $/year −10,000 −8,500
Revenue, $/year 13,000 15,500
Resale value, $ 500 1,000
Contract life, years 3 6
Add DN alternative since these are revenue alternatives; determine i* for H and K.
From IRR function, i*H = 8.9% < MARR = 20%. Eliminate H (Hobby-Tru).
Select K (Knack’s) since i*K = 25.9% > MARR and K has a higher initial cost.
If i*H is not determined initially, the incremental cash flows are determined and the
IRR function displays ∆i* = 35.7%; select K.
6.30 The Texas Department of Transportation (TxDOT) is considering two designs for
crash barriers along a reconstructed portion of I-10. Design 2B will cost $3 million
to install and $135,000 per year to maintain. Design 4R will cost $3.7 million to
install and $70,000 per year to maintain. Determine which design should be
selected based on a rate of return analysis if TxDOT uses a MARR of 6% per year
and a 20-year project period.
0 = −700,000 + 65,000(P/A,∆i*,20)
(P/A,∆i*,20) = 10.7692
Factor: Solve for ∆i* using tables at n = 20 and interpolate; ∆i* = 6.8% per year
Spreadsheet: = RATE(20,65000,−700000) yields ∆i* = 6.79% per year
∆i* > MARR of 6% per year; select design 4R, the more expensive one.
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6.31 The manager of Liquid Sleeve, Inc., a company that makes a sealing solution for
machine shaft surfaces that have been compromised by abrasion, high pressures, or
inadequate lubrication, is considering adding Al or Fe nanoparticles to its solution
to increase the product’s performance at high temperatures. The costs associated
with each are shown below. The company’s MARR is 20% per year.
a. Determine which nanoparticle type the company should select using an
incremental rate of return analysis.
b. Solve part (a) using a spreadsheet and, on the same worksheet, plot the PW
versus different i values for each alternative. Indicate the breakeven i* value and
the MARR value on the plot.
c. Plot PW versus Δi values and use it to select the better alternative with
MARR = 20% per year. Is the answer the same as in part (a)?
Type Fe Type Al
First cost, $ −150,000 −280,000
Annual operating cost, $ per year −92,000 −74,000
Life, years 2 4
(a) Develop cash flow series to get incremental cash flows.
Incremental
Cash flows, $1000 cash flow, $1000
Year Type Fe Type Al (Al − Fe)___
0 −150 −280 −130
1 −92 −74 18
2 −92 + 30 − 150 −74 138
3 −92 −74 18
4 −92 + 30 −74 + 70 58
Factor: Solve by trial and error between i values of, say, 25% and 30%;
interpolate to get ∆i* = 27.3% per year.
Spreadsheet: Enter incremental cash flows; IRR function displays ∆i* = 27.35%
Since 27.3% > MARR = 20%; select type Al
(b) and (c) plots are developed using i and ∆i values. Decision: select Al.
15
6.32 A biotech company is considering two processes for isolating DNA material. The
incremental cash flows between the two alternatives, J and S, have an incremental
rate of return that is less than 40%, which is the MARR of the company. However,
the company CEO prefers the more expensive process S. She believes the company
can implement cost controls to reduce the annual operating cost of the more
expensive process, alternative S. How much of a reduction in AOC in $ per year is
necessary for Δi* to equal the MARR? Solve using factors first, then a single-cell
function coupled with the GOAL SEEK tool.

Year (S – J), $
0 –900,000
1 400,000
2 400,000
3 400,000
Factor: 0 = −900,000 + AOC(P/A,40%,3)

= −900,000 + AOC(1.5889)
AOC = $566,430
16
Required reduction = 566,430 – 400,000
= $166,430 per year
Spreadsheet: Use a PV function and GOAL SEEK to change the cell with
the current ∆AOC = $400,000 while forcing the PV function
value to equal zero. Result is $566,422.
Required reduction = 566,422 – 400,000 = $166,422 per year
6.33 As project manager, you received from the purchasing department a listing of
estimated annual cash flow differences between two electrode setups you want to
install. The MARR is 12% per year and alternative Dryloc requires the larger initial
investment compared to NPT. Only one can be selected.
a. Determine which should be selected using an AW-based ROR analysis.
b. Use a graph of the incremental values to determine the largest MARR value that
justifies the NPT alternative.

Year (Dryloc – NPT), $
0 –56,000
1–8 8,900
9 12,000
(a) 0 = −56,000(A/P,∆i*,9) + 8900 + (12,000 – 8900)(A/F,∆i*,9)
Solve for ∆i* by trial and error or spreadsheet.
Spreadsheet: = RATE(9,8900,−56000,3100) displays a ∆i* of 8.48%, which is

less than MARR = 12%
Select Dryloc
(b) By graph, to select NPT the maximum MARR ≈ 8%. (Actually, it is 8.48%,
as determined by the RATE function.)
Any MARR > 8.48% indicates selection of Dryloc.
17
6.34 Poly-Chem Plastics is considering two types of injection molding machines:
hydraulic and electric. The hydraulic press (HP) will have a first cost of $600,000,
annual costs of $200,000, and a salvage value of $70,000 after 5 years. Electric
machine technology (EMT) will have a first cost of $800,000, annual costs of
$150,000, and a salvage value of $130,000 after 5 years.
a. Use an AW-based equation to determine the ROR on the extra investment
required for the EMT alternative.
b. Determine the machine to select, if the MARR is 16% per year.
c. Plot the AW versus i graph for each alternative’s cash flows and utilize it to
determine the largest MARR which will justify the extra investment of $200,000
in EMT.
(a) EMT has a larger initial investment than HP.
0 = −200,000(A/P,∆i*,5) + 50,000 + 60,000(A/F,∆i*,5)
Solve for ∆i* by trial and error or spreadsheet
Spreadsheet: ∆i* = 14.5%
(b) From part (a), ∆i* < MARR = 16%; select HP.
(c) Graph indicates a crossing of AW lines at ≈ 14.5%. Any MARR below this
value will justify the extra investment in EMT.
18
6.35 A metal plating company on government contract is considering four different
methods for recovering by-product heavy metals from a processing site’s liquid
waste. The investment costs and annual net incomes associated with each method
have been estimated. All methods have an 8-year life; the MARR is 11% per year;
and an AW-based ROR analysis is required by the government agency prior to final
selection. (a) If the methods are independent, because they can be implemented at
different plants, which ones are acceptable? (b) If the methods are mutually
exclusive, select the economically best one.
First Salvage Annual Net

Method Cost, $ Value, $ Income, $/year
A −30,000 +1,000 +4,000

B −36,000 +2,000 +5,000
C −41,000 +500 +8,000
D −53,000 −2,000 +10,500
(a) Calculate i* by trial and error or RATE function; compare to MARR = 11%.
RATE is used here in all cases to determine i* values. DN is an option.
A: 0 = −30,000(A/P,i*,8) + 4000 + 1000(A/F,i*,8)

i* = 2.1%
REJECT
B: 0 = −36,000(A/P,i*,8) + 5000 + 2000(A/F,i*,8)

i* = 3.4%
REJECT
19
C: 0 = −41,000(A/P,i*,8) + 8000 + 500(A/F,i*,8)
i* = 11.3%
ACCEPT
D: 0 = −53,000(A/P,i*,8) + 10,500 − 2000(A/F,i*,8)

i* = 11.1%
ACCEPT (marginal)
(b) Revenue alternatives; compare to DN initially.
From (a) above, eliminate A and B since i* < MARR = 11%. Determine ∆i*
between D and C.
D vs C: 0 = −12,000(A/P,∆i*,8) + 2,500 − 2500(A/F,∆i*,8)

∆i* = 10.4%
Eliminate D
Select method C
6.36 Old Southwest Canning Co. has determined that any one of four sterilizing
machines can be used in its chili-canning operation. The costs of the machines are
estimated; all machines have a 5-year useful life. (a) If the MARR is 25% per year,
determine which machine should be selected on the basis of an ROR analysis. (b)
(Spreadsheet exercises) Develop a spreadsheet similar to Figure 6.11 to select one
alternative. (c) There is a controversy about the MARR in this selection between
yourself and the capital investment officer. You want 15%, not 25%, since the
equipment’s sterilization ability selected at MARR of 25% does not have excellent
quality, as tests have shown. Use your spreadsheet to determine if the selection will
change at 15% from the previous choice. (Note: If your instructor asks for it, apply
the logical IF function to make the determination if a machine is incrementally
justified for the two MARR values. Refer to Appendix A for help on developing the
IF function.)
Machine First Cost, $ AOC, $
1 −28,000 −20,000
2 −51,000 −12,000
3 −32,000 −19,000
4 −33,000 −18,000
20
(a) Factors: Rank cost alternatives by increasing initial investment: 1, 3, 4, 2
3 to 1: 0 = −4000 + 1000(P/A,∆i*,5)
∆i* = 7.93% < MARR = 25% Eliminate 3
4 to 1: 0 = −5000 + 2000(P/A,∆i*,5)
∆i* = 28.65% > MARR = 25% Eliminate 1
2 to 4: 0 = −18,000 + 6000(P/A,∆i*,5)
∆i* = 19.86% < MARR = 25% Eliminate 2
Select machine 4
(b) Spreadsheet (below, top table) is set up with the ordered alternatives 1, 3, 4, 2.
Costs only are involved. Select machine 4, as in the factor-based solution.
(c) Spreadsheet (below, bottom table) has the MARR of 15% entered into cell H30
and IF functions in row 30.
Selection does change to machine 2 at MARR = 15%.
6.37 Terry, an engineering technology graduate who is very entrepreneurial, wants to

start an excavation and foundation business in Orlando by investing his own
savings to fund part of the start-up. A primary decision is the size of a used dump
truck to purchase. He knows that as the bed size increases, the net income increases,
but he is uncertain whether the incremental expenditures for the larger sizes are
justified. The estimated cash flows are listed below; all trucks have a 5-year useful
life. Terry expects a return of at least 18% per year on this investment. (a)
Determine which size truck he should purchase. (b) If two trucks are to be
21
purchased, select the size of the second truck. (c) Make both selections using a
spreadsheet. (Using single-cell functions for each incremental analysis is
acceptable.)
Annual
Truck Bed Initial M&O, Revenue, Salvage
Size, m3 Cost, $ $/year $/year Value, $
8 −30,000 −14,000 26,500 2,000

10 −34,000 −15,500 30,000 2,500
15 −38,000 −18,000 33,500 3,000
20 −48,000 −21,000 40,500 3,500
25 −57,000 −26,000 49,000 4,600
These are revenue alternatives; add DN initially and compare incrementally. All ∆i*
values can be determined by trial and error or spreadsheet function. The functions
are used here.
(a) 8 vs. DN: 0 = −30,000(A/P,∆i*,5) + (26,500 – 14,000) + 2000(A/F,∆i*,5)

∆i* = 31.7%
Eliminate DN
10 vs. 8: 0 = −4000(A/P,∆i*,5) + (14,500 – 12,500) + 500(A/F,∆i*,5)

∆i* = 42.4%
Eliminate 8
15 vs. 10: 0 = −4000(A/P,∆i*,5) + (15,500 – 14,500) + 500(A/F,∆i*,5)

∆i* = 10.9%
Eliminate 15
20 vs. 10: 0 = −14,000(A/P,∆i*,5) + (19,500 – 14,500) + 1000(A/F,∆i*,5)

∆i* = 24.2%
Eliminate 10
25 vs. 20: 0 = −9000(A/P,∆i*,5) + (23,000 – 19,500) + 1100(A/F,∆i*,5)

∆i* = 29.0%
Eliminate 20
Purchase 25 m3 bed size
(b) For second truck, purchase truck that was eliminated next to last: 20 m3
22
(c) Spreadsheet analysis results in selection of 25 m3 truck bed size. For part (b),
purchase size that was eliminated next to last, the 20 m3 bed size.
If single-cell RATE functions are used, a solution sample follows.
6.38 You are considering five projects, all of which can be considered to last
indefinitely. If the MARR is 15% per year, determine which should be selected if
they are (a) independent projects, and (b) mutually exclusive alternatives.
First Net Annual ROR,

Alternative Cost, $ Income, $ %
A −20,000 +3,000 15.0

B −10,000 +2,000 20.0
C −15,000 +2,800 18.7
D −70,000 +10,000 14.3
E −50,000 +6,000 12.0
(a) Select all projects with a ROR ≥ MARR of 15%. Select A, B, and C
23
(b) Eliminate all alternatives with ROR < MARR; compare others incrementally:
Eliminate D and E. Rank remaining revenue alternatives according to
increasing first cost: B, C, A. Add DN initially.
B vs DN: ∆i* = 2000/10,000

= 0.20 20% > MARR Eliminate DN
C vs B: ∆i* = 800/5000
= 0.16 16% > MARR Eliminate B
A vs C: ∆i* = 200/5000
= 0.04 4% < MARR Eliminate A
Select alternative C
6.39 The four proposals described below are being evaluated to serve as patients’ records
security systems in North American, European, and Asian hospitals operated by
AMD Health Corp.
a. If the proposals are independent, which one(s) should be selected at a MARR of
17% per year?
b. If the proposals are mutually exclusive, which one should be selected at a
MARR of 14.5% per year?
c. If the proposals are mutually exclusive, which one should be selected at a
MARR of 9% per year?
Δi*, %, When
Overall Compared with
Initial Rate of Proposal
Investment, Return,
Proposal $ % A B C
A −600,000 11.7
B −900,000 22.2 43.3
C −1,400,000 17.9 22.5 10.0
D −1,900,000 15.8 17.8 10.0 10.0
(a) Select all proposals with an overall ROR ≥ 17% per year.
Select proposals B and C
24
(b) Compare revenue alternatives (proposals) incrementally after ranking: DN, A,
B, C, D.
A to DN: ∆i* = 11.7% < 14.5% Eliminate A

B to DN: ∆i* = 22.2% > 14.5% Eliminate DN
C to B: ∆i* = 10.0% < 14.5% Eliminate C
D to B: ∆i* = 10.0% < 14.5% Eliminate D
Select proposal B
(c) Compare proposals incrementally after ranking: DN, A, B, C, D
A to DN: ∆i* = 11.7% > 9% Eliminate DN

B to A: ∆i* = 43.3% > 9% Eliminate A
C to B: ∆i* = 10.0% > 9% Eliminate B
D to C: ∆i* = 10.0% > 9% Eliminate C
Select proposal D
6.40 Leenflow, Inc., a company that sells a mobile marketing platform that helps
businesses improve engagement with customers in a personalized way, wants to
expand its operation by adding new products. Any or all of the products shown
below can be added. If the company uses a MARR of 15% per year and a 5-year
study period, which products, if any, should the company introduce? Write a PW-
based ROR equation and a single-cell spreadsheet function for each analysis. Use
the spreadsheet display for your decisions.
1 2 3 4
Initial cost, $ −340,000 −500,000 −570,000 −620,000

Annual cost, $/year −70,000 −64,000 −48,000 −40,000
Annual revenue, $/year 180,000 190,000 220,000 205,000
Proposals are independent; compare each against DN. Monetary units in $1000.
Product 1: Relation: 0 = −340 + (180 – 70)(P/A,i*,5)

Spreadsheet: = RATE(5,180−70,−340) displays 18.52%
i* = 18.52% > MARR = 15% ACCEPT

i* = 8.23% < MARR = 15% REJECT
25
Product 3: Relation: 0 = −570 + (220 –48)(P/A,i*,5)
i* = 15.49% > MARR = 15% ACCEPT

i* = 10.35% < MARR = 15% REJECT
Leenflow should introduce products 1 and 3.
6.41 Spectrum Imaging Systems is considering the purchase of a new printer based on
recent contracts it received for printing weekly magazines and mail-out advertising
materials. The operating costs and revenues generated are related to a large extent
to the speed and other capabilities of the printer. Spectrum uses a 3-year planning
period and a MARR of 15% per year. Which of the four printers detailed below
should the company acquire on the basis of an incremental ROR analysis?
First AOC, Revenue, Salvage

Printer Cost, $ $ per year $ per year Value, $
Nx-1 −500,000 −350,000 450,000 70,000

Nx-2 −600,000 −300,000 460,000 85,000
Nx-3 −650,000 −275,000 480,000 95,000
Nx-4 −750,000 −200,000 510,000 120,000
Revenue alternatives; add DN; calculate i*; eliminate if i* < 15%; order remaining
alternatives; determine ∆i* using trial & error or RATE function; compare to 15%.
RATE functions applied here. Monetary units are $1000.
Nx-1: = RATE(3,100,−500,70) i* = −12.60% Eliminate
Nx-2: = RATE(3,160,−600,85) i* = −2.74% Eliminate
Nx-3: = RATE(3,205,−650,95) i* = 4.25% Eliminate
Nx-4: = RATE(3,310,−750,120) i* = 17.77% Retain
With only Nx-4 remaining, make the conclusion.
∆i* =17.77% > MARR = 15% Select Nx-4
26
6.42 Allstate Insurance Company is considering the installation of one of five fraud
detection systems, all of which can be considered to last indefinitely. If the
company’s MARR is 14% per year, determine which one should be selected on the
basis of a rate of return analysis using the estimates shown.
A B C D E
First cost, $ −10,000 −25,000 −15,000 −70,000 −50,000

Annual net income, $/year 2,000 4,000 2,900 10,000 6,000
Overall ROR, % 20.0 20.0 19.3 14.3 12.0
Order revenue alternatives: DN, A, C, B, E, D; MARR = 14%
A to DN: ∆i* = (2000/10,000)(100) = 20% > MARR Eliminate DN

C to A: ∆i* = (900/5000)(100) = 18% > MARR Eliminate A
B to C: ∆i* = (1100/10,000)(100) = 11% < MARR Eliminate B
E to C: ∆i* = (3100/35,000)(100) = 8.9% < MARR Eliminate E
D to C: ∆i* = (7100/55,000)(100) = 12.9% < MARR Eliminate D
Select alternative C
6.43 Caroline received the analysis below from an employee concerning four revenue
proposals.
a. If the proposals are independent, which one(s) should she select at MARR =
15.5% per year?
b. If the proposals are mutually exclusive, which one should she select at MARR =
10% per year?
c. If the proposals are mutually exclusive, which one should she select at MARR =
14% per year?
Δi*, When
Compared with
Proposal
Initial Overall
Proposal Investment, $ i*, % A B C
A −40,000 29
B −75,000 15 9
C −100,000 16 7 20
D −200,000 14 10 13 12
27
(a) Select A and C with ROR > MARR = 15.5%
(b) Order proposals: DN, A, B, C, D; MARR = 10%

A to DN: ∆i* = 29% > MARR Eliminate DN
B to A: ∆i* = 9% < MARR Eliminate B
C to A: ∆i* = 7% < MARR Eliminate C
D to A: ∆i* = 10% = MARR Eliminate A
Select D, which has a ∆i* exactly equal to MARR
(c) Same as part (b), except with MARR = 14%, the last comparison changes.
D to A: ∆i* = 10% < MARR Eliminate D
Select A
6.44 According to Descartes’ rule of signs, how many possible i* values are there for net
cash flow series that have the following signs:
a. −+++−+++−
b. −−++
c. +−−−−−−+−+−−−
d. −−−−+++−−−−−+
(a) four; (b) one; (c) five; (d) three
6.45 Charles owns a home with solar panels on the roof. His utility company has a “buy-
back” program that charges homeowners for the net energy used each quarter. He
listed the quarterly charges and buy-back dollars for the 2 years he has been in the
program. (a) Use Descartes’ rule to determine the maximum number of possible i*
values. (b) Use Norstrom’s criterion to determine if there is only one positive i*
value. (c) Determine the i* value(s) for Charles.
Quarter Charges, $ Buy-back, $
1 −200 50
2 −100 100
3 −100 250
4 −100 260
5 −100 200
6 −150 170
7 −120 150
8 −150 20
28
NCF = net cash flow; S1 = NCF1 < 0
Quarter Charges Buy-back NCF Cumulative NCF

1 −200 50 −150 −150
2 −100 100 0 −150
3 −100 250 +150 0
4 −100 260 +160 +160
5 −100 200 +100 +260
6 −150 170 +20 +280
7 −120 150 +30 +310
8 −150 20 −130 +180
(a) From net cash flows, there are two sign changes, so, two possible i* values
(b) From cumulative cash flow, sign starts negative and changes once. Norstrom’s
criterion is satisfied; therefore, there is a unique nonnegative i* value.
(c) By spreadsheet, enter the NCF values; use IRR function to determine i* =
42.3% per quarter.
6.46 A manufacturer of heavy-tow carbon fibers (used for sporting goods, thermoplastic
compounds, windmill blades, etc.) reported the net cash flows shown.
a. Determine the number of possible i* values.
b. (Spreadsheet exercises) Apply Norstrom’s criterion, then write the PW-based
ROR relation for trial-and-error determination of the i* value(s), and finally
determine all rate of return values between −50% and 120% using the IRR
function with “guess” values entered.
c. Determine the PW values at different rates of return: −50%, 0%, 120%, plus the
i* value(s) determined in part b.
d. What conclusion can you make about the i* values of this cash flow series?
Year Net Cash Flow, $
0 −17,000
1 20,000
2 −5,000
3 8,000
(a) There are three sign changes in NCF series, therefore, three possible i* values.
29
(b) Cumulative NCF starts < 0, but has more than one sign change; no unique
i* > 0 is indicated. The PW-based ROR relation is
0 = −17,000 + 20,000(P/F,i*,1) − 5000(P/F,i*,2) + 8000(P/F,i*,3)
Spreadsheet: IRR function at different guesses displays an i* of 24.41%

for all values.
(c) PW values decrease for all ROR values from −50% to 120%.
(d) The additional two possible i* values are not in the range identified (and may
not be real numbers).
6.47 Hitec Home Services manufactures a ventilation controller designed for monitoring
and controlling carbon monoxide in parking garages, boiler rooms, tunnels, etc. The
net cash flows associated with one phase of the operation are shown below.
a. How many possible rate of return values are there for this cash flow series?
b. Find all the rate of return values between 0 and 100% using tabulated factors and
a spreadsheet.
c. (Added spreadsheet exercise) Resolve to find any i* values between −99% and
0%. Does the result agree with the conclusion of the rule of signs (Descartes’
rule) and cumulative cash flow (Norstrom’s criterion) tests?
0 −30,000
1 20,000
2 15,000
3 −2,000
30
(a) By cash flow rule of signs, there are two sign changes; may be two i* values.
(b) 0 = −30,000 + 20,000(P/F,i*,1) + 15,000(P/F,i*,2) − 2000(P/F,i*,3)
Factors:
Try 6%: $538.8 > 0 too low
Try 7%: $160.4 > 0 too low
Try 8%: $−210.1< 0 too high
Interpolation yields i* = 7.43%
Spreadsheet: Function = IRR(B1:B4,guess) displays an i* of 7.43% for any

guess value from 0% to 100%
(c) Cumulative NCF starts negative and has one sign change. There is one unique
positive i*. The IRR function with guesses in the range 0% to −99% finds
another i* at −88.1956%. This does agree with the two tests, as −88.1956% <
0, thus not positive.
6.48 Arc-bot Technologies, manufacturers of six-axis, electric servo-driven robots, has

experienced annual expenses and savings in its shipping department through
improved supply-chain software applications. (a) Determine the number of possible
rate of return values. (b) Find all i* values between 0 and 100%.
Year Expenses, $ Savings, $
0 −33,000 0
1 −15,000 18,000
2 −40,000 38,000
3 −20,000 55,000
4 −13,000 12,000
The NCF and cumulative NCF are shown below.
Year Expenses, $ Savings, $ NCF, $ Cumulative NCF, $

0 −33,000 0 −33,000 −33,000
1 −15,000 18,000 +3,000 −30,000
2 −40,000 38,000 −2000 −32,000
3 −20,000 55,000 +35,000 +3000
4 −13,000 12,000 −1000 +2000
(a) There are four sign changes in NCF series; four possible i* values.
31
(b) Cumulative cash flow starts negative and changes sign only once. Therefore,
there is only one positive, real-number i* value.
0 = −33,000 + 3000(P/F,i*,1) − 2000(P/F,i*,2) + 35,000(P/F,i*,3)

−1000(P/F,i*,4)
Solve by trial and error or spreadsheet
Spreadsheet: i* = 2.1% per year
6.49 Five years ago, Logocom made a $5 million investment in a new high-temperature
material. The product was not well accepted after the first year on the market.
However, when it was reintroduced 4 years later, it did sell well during the year.
Major research funding to broaden the applications has cost $15 million in year 5.
Determine the rate of return for these net cash flows (in $1000 units).
Year NCF, $1000

0 −5,000
1 4,000
2 0
3 0
4 20,000
5 −15,000
Cash flow signs change two times, but cumulative cash flow starts negative and
changes sign only once. (St series is: −5000; −1000; −1000; −1000; +19,000; and
+4000.) There is only one positive, real-number i* value.
0 = −5000 + 4000(P/F,i*,1) + 20,000(P/F,i*,4) − 15,000(P/F,i*,5)
Solve by trial and error or spreadsheet.
Spreadsheet: i* = 44.1% per year
6.50 State a fundamental reason why the internal rate of return (IRR) and the external
rate of return (ERR) will have different values when the cash flow series is
nonconventional and multiple i* values are indicated.
In the case of the IRR, all excess funds are assumed to be retained within the project
and earn at any one of the multiple i* value. For the ERR, the external rates for
reinvestment of excess funds and borrowing in negative net cash flow years will
alter the i* value, except when the reinvestment rate is exactly equal to the i* value.
32
6.51 Explain why it is not a good practice to set the reinvestment rate on excess funds
and the borrowing rate for negative NCF years equal to each other when the
external rate of return (ERR) is to be determined.
Setting the reinvestment and borrowing rates equal to each other implies that no
profit margin is anticipated over time. A company cannot continue in business in
such circumstances.
6.52 For the cash flow series shown (a) determine the number and type of possible i*
values using the two sign tests, (b) find the ERR using the MIRR method and
Equation [6.4] with a reinvestment rate of 20% per year and a borrowing rate of
10% per year, and (c) use the MIRR function to find the ERR.
Year 1 2 3 4 5 6
Cash Flow, $ +4100 −2000 −7000 +12,000 −700 +800
(a) Rule of signs test: up to 4 i* values

Cumulative CF sign test: inconclusive, since S0 > 0
(b) PW0 = −2000(P/F,10%,2) − 7000(P/F,10%,3) − 700(P/F,10%,5)

= −2000(0.8264) − 7000(0.7513) − 700(0.6209)
= $−7347
FW6 = 4100(F/P,20%,5) + 12,000(F/P,20%,2) + 800

= 4100(2.4883) + 12,000(1.4400) + 800
= $28,282
−7347(F/P,i′,6) + 28,282 = 0
−7347(1 + i′)6 + 28,282 = 0
ERR = i' = (28,282/7347)1/6 – 1

= 0.252 (25.2%)
(c) Enter the CF values in cells B1 (as a 0) through B7. The function
= MIRR(B1:B7,10%,20%) displays an i′ of 25.2%.
6.53 For the net cash flows shown, find the external rate of return with a reinvestment
rate of 15% per year, using (a) the manual ROIC method and (b) a spreadsheet to
verify the answer.

0 +48,000
1 +20,000
2 −90,000
3 +50,000
4 −52,000
33
(a) Cash flow rule of signs indicates three possible rate of return values.
Cumulative cash flow test provides no information, since cumulative cash flow
series starts with a positive value and changes sign more than once. Use
Equation [6.5] with ir = 0.15.
F0 = 48,000 > 0, use ir

F1 = 48,000(1.15) + 20,000 = 75,200 > 0, use ir
F2 = 75,200(1.15) − 90,000 = −3520 < 0, use i″
F3 = −3520(1 + i″) + 50,000 = 46,480 −3520i″ > 0 for i″ < 1320%; use ir
F4 = (46,480 – 3520i″)(1.15) −52,000 = 1,452 – 4048i″
Set F4 = 0 and solve for i″
0 = 1452 – 4048i″
i″ = 0.359 (35.9%)
(b) Develop a spreadsheet similar to Figure 6.8 to determine i″ = 35.9% in cell F8.
GOAL SEEK forces cell C6 to 0.00 while changing cell F8.
6.54 The net cash flows series shown may have multiple i* values. If the reinvestment
rate is 18% per year and the borrowing rate is 10%, find the ERR using (a) the
manual MIRR approach coupled with the RATE function, and (b) the MIRR
spreadsheet function.
Year 0 1 2 3
Net cash flow, $ +16,000 −32,000 −25,000 +70,000
(a) Follow the steps of the modified ROR procedure.
PW0 = – 32,000(P/F,10%,1) – 25,000(P/F,10%,2)

= – 32,000(0.9091) – 25,000(0.8264)
= $−49,751
FW3 = 16,000(F/P,18%,3) + 70,000

= 16,000(1.6430) + 70,000
= $96,288
34
96,288 = 49,751(F/P,i′,3)
(F/P,i′,3) = 1.9354
The function = RATE(3,49751,−96288) yields an i′ of 24.6% per year
(b) Enter NCF values in C2 through C5. The function = MIRR(C2:C5,10%,18%)

displays an i′ of 24.6%.
6.55 For the cash flows shown, determine:

a. the number of possible i* values.
b. the i* value displayed by the IRR function.
c. the external rate of return using the MIRR method if ir = 18% per year and
ib = 10% per year. Verify your answer with the spreadsheet function.
Year 0 1 2 3 4
Revenues, $ 0 25,000 19,000 4000 28,000
Costs, $ −6000 −30,000 −7000 −6000 −12,000
First find net cash flows (NCF)
Year 0 1 2 3 4

Revenue, $ 0 25,000 19,000 4,000 28,000
Costs, $ −6,000 −30,000 −7,000 −6,000 −12,000
NCF, $ −6000 −5000 12,000 −2000 16,000
Cumulative, $ −6000 −11,000 +1,000 −1,000 +15,000
(a) Rule of signs test: three sign changes; therefore, up to 3 i* values

Cumulative CF sign test: Starts with NCF0 < 0; 3 sign changes; no unique,
positive i*
(b) Enter NCF values. Function: = IRR(B1:B5) displays i* = 39.9% per year
(c) PW0 = − 6000 − 5000(P/F,10%,1) − 2000(P/F,10%,3)

= − 6000 − 5000(0.9091) − 2000(0.7513)
= $−12,048
FW4 = 12,000(F/P,18%,2) + 16,000

= 12,000(1.3924) + 16,000
= $32,709
−12,048(F/P,i',4) + 32,709 = 0
−12,048(1 + i')4 + 32,709 = 0
i' = (32,709/12,048)1/4 – 1
= 0.284 (28.4%)
Function = MIRR(B1:B5,10%,18%) verifies that i′ = 28.4% per year
35
6.56 Harley worked for many years to save enough money to start his own residential
landscape design business. The net cash flows shown are those he recorded for the
first 6 years as his own boss. Find the external rate of return using the modified rate
of return approach with a reinvestment rate of 15% per year and a borrowing rate of
8%. Additionally, after using the procedure, use the MIRR function to confirm your
answer.
Year 0 1 2 3 4 5 6
NCF, $ −9000 +4100 −2000 −7000 +12,000 +700 +800
Manual: Follow the steps of the modified ROR procedure.
PW0 = −9000 − 2000(P/F,8%,2) − 7000(P/F,8%,3)

= −9000 − 2000(0.8573) − 7000(0.7938)
= $−16,271
FW6 = 4100(F/P,15%,5) + 12,000(F/P,15%,2) + 700(F/P,15%,1) + 800

= 4100(2.0114) + 12,000(1.3225) + 700(1.1500) + 800
= $25,722
25,722 = 16,271(F/P,i′,6)
(F/P,i′,6) = 1.5808
Use interpolation in factor tables or spreadsheet to find i′.
Spreadsheet: = RATE(6,−16271,25722) displays an i′ of 7.9% per year
Spreadsheet verification: Enter NCF in B2:B8; enter = MIRR(B2:B8,8%,15%) to

display an i′ of 7.9% per year.
6.57 Your friend owns a company that makes clutch disks for race cars. He had the net
cash flows shown for one department over a 4-year period after making an
improvement investment of $65,000.
a. Apply the two sign rules first, then calculate the internal rate of return.
b. Calculate the external rate of return using the ROIC method manually with a
reinvestment rate of 15% per year.
c. Calculate the external rate of return using the MIRR method manually with a
reinvestment rate of 15% per year and a borrowing rate of 8% per year.
d. Rework parts (b) and (c) using spreadsheet functions.
Year 0 1 2 3 4
NCF, $1000 −65 30 84 −10 −12
36
First, calculate the cumulative net cash flow (NCF) series.
Cumulative
Year NCF, $1000 NCF, $1000
0 −65 −65
1 30 −35
2 84 +49
3 −10 +39
4 −12 +27
(a) The NCF series indicates up to two i* values; cumulative NCF starts out
negative and changes sign only once, indicating there is only one, real-number
positive i* value.
0 = −65 + 30(P/F,i*,1) + 84(P/F,i*,2) – 10(P/F,i*,3) – 12(P/F,i*,4)
Spreadsheet: Use IRR function to solve for i* = 28.64% per year
(b) Apply net-investment procedure for the ROIC method because reinvestment
rate ir is not equal to the i* rate of 28.64% per year
F0 = −65 F0 < 0; use i″
F1 = −65(1 + i″) + 30 F1 < 0; use i″
F2 = F1(1 + i″) + 84 F2 > 0; use ir (F2 must be > 0 because last two terms
are negative)
F3 = F2(1 + 0.15) −10 F3 > 0; use ir (F3 must be > 0 because last term is
negative)
F4 = F3(1 + 0.15) –12
Set F4 = 0 and solve for i″ by trial and error
F1 = −65 – 65 i″ + 30
F2 = (−65 – 65 i″ + 30)(1 + i″) + 84
= −65 − 65i″ + 30 –65i″ – 65 i″2 + 30i″ +84
= −65 i″2 –100 i″ + 49
F3 = (−65 i″2 –100 i″ + 49)(1.15) – 10

= −74.8 i″2 –115 i″ + 56.4 – 10
= −74.8 i″2 –115 i″ + 46.4
F4 = (−74.8 i″2 –115i″ + 46.4)(1.15) –12
= −86i″2 –132.3 i″ + 53.3 – 12
= −86 i″2 –132.3i″ + 41.3
37
Set F4 = 0 and solve by quadratic equation, trial and error, or spreadsheet.
i″ = 0.26.61 (26.61% per year)
(c) PW0 = −65 −10(P/F,ib,3) − 12(P/F,ib,4)

= −65 −10(P/F,8%,3) − 12(P/F,8%,4)
= −65 − 10(0.7938) − 12(0.7350)
= $−81.76
FW4 = 30(F/P,ir,3) + 84(F/P,ir,2)

= 30(F/P,15%,3) + 84(F/P,15%,2)
= 30(1.5209) + 84(1.3225)
= $156.72
PW0(F/P,i′,4) + FW4 = 0
−81.76(1 + i′)4 + 156.72 = 0
(1 + i′)4 = 1.9168
i′ = 0.1766 (17.66%)
(d) MIRR: Function: = MIRR(B2:B6,8%,15%) displays an i′ of 17.66%, which

verifies the manual solution.
ROIC: Spreadsheet displays an i″ of 26.62% using GOAL SEEK, which

verifies the manual solution.
6.58 According to Descartes’ rule of signs, the possible number of i* values for the
following net cash flow series is: ++++−−−−−−+−+−−−++
a. 2
b. 4
c. 6
d. 8
Answer is (c)
38
6.59 When using the modified ROR method to remove multiple ROR values, an
additional estimate needed besides the cash flows and their timings is the:
a. ROIC value
b. external rate of return
c. reinvestment rate
d. internal rate of return
Answer is (c)
6.60 For the net cash flows and cumulative net cash flows shown below, the value of x is
nearest:
a. $−8,000
b. $−16,000
c. $16,000
d. $41,000
Year 1 2 3 4 5
Net cash flow, $ +13,000 −29,000 −25,000 +50,000 x
Cumulative NCF, $ +13,000 −16,000 −41,000 +9,000 +1,000
9000 + x = 1000
x = −8000
Answer is (a)
6.61 Scientific Instruments, Inc. uses a MARR of 8% per year. The company is
evaluating a new process to reduce water effluents from its manufacturing
processes. The estimates associated with the process follow. In evaluating the
process on the basis of a rate of return analysis, the correct equation to use is
Alternative I
First cost, $ −40,000

NCF, $ per year 13,000
Salvage value, $ 5,000
Life, years 3
a. 0 = −40,000 + 13,000(P/A,i*,3) + 5000(P/F,i*,3)

b. 0 = −40,000(A/P,i*,3) + 13,000 + 5000(A/F,i*,3)
c. 0 = −40,000(F/P,i*,3) + 13,000(F/A,i*,3) + 5000
d. Any of the above
Answer is (d)
39
6.62 For the cash flows shown, the sum of the incremental cash flows (B − A) is
a. $2500
b. $3500
c. $6000
d. $8000
Year A B
0 −10,000 −14,000
1 +2,500 +4,000
2 +2,500 +4,000
3 +2,500 +4,000
4 +2,500 +4,000
5 +2,500 +4,000
Find sum from incremental cash flows column.
Year A B B−A
0 −10,000 −14,000 −4000
1 +2500 +4000 +1500
2 +2500 +4000 +1500
3 +2500 +4000 +1500
4 +2500 +4000 +1500
5 +2500 +4000 +1500
+3500
Answer is (b)
6.63 A small engineering firm borrows $300,000 at 0.7% per month interest. If the firm
makes a payment of $50,000 at the end of the first month, the unrecovered loan
balance immediately after the payment is made is closest to:
a. $187,900
b. $198,300
c. $224,600
d. $252,100
Amount due after 1 month = 300,000(1.007)

= $302,100
Balance after $50,000 payment = 302,100 – 50,000
= $252,100
Answer is (d)
40
6.64 If a 6-year study period is used for an ROR evaluation, the incremental cash flow
between machines B and A in year 3 is closest to:
a. $1200
b. $4200
c. $12,000
d. $13,200
Machine
A B
First cost, $ −15,000 −25,000

Annual operating cost, $ −1,600 −400
Life, years 3 6
Incremental CF, year 3 = − 400 − (−1600 – 15,000 + 3000)

= +$13,200
Answer is (d)
6.65 A total of $200,000 was invested in two projects identified as X1 and X2. If the
overall rate of return on the $200,000 was 26% and the overall rate of return on the
$40,000 invested in X2 was 14%, the overall rate of return on X1 was closest to:
a. >30%
b. 29%
c. 27%
d. 25%
40,000(0.14) + (200,000 – 40,000)(RORX1) = 200,000(0.26)

RORX1 = 0.29 (29%)
Answer is (b)
6.66 The four alternatives described below are being evaluated by the rate of return
method. If the alternatives are mutually exclusive, the selected alternative at a
MARR of 14.5% per year is:
a. A
b. B
c. C
d. D
41
Δi*, %, When
Compared with
Overall Rate Alternative
Initial
Alternative Investment, $ of Return, % A B C
A −60,000 11.7 — — —
B −90,000 22.2 43.3 — —
C −140,000 17.9 22.5 10.0 —
D −190,000 15.8 17.8 10.0 10.0
Compare alternatives incrementally after ranking: DN, A, B, C, D
A to DN: ∆i* = 11.7% < 14.5% Eliminate A

B to DN: ∆i* = 22.2% > 14.5% Eliminate DN
C to B: ∆i* = 10.0% < 14.5% Eliminate C
D to B: ∆i* = 10.0% < 14.5% Eliminate D; Select B
Answer is (b)
6.67 Alternative G has a first cost of $250,000 and annual costs of $73,000. Alternative
H has a first cost of $350,000 and annual costs of $48,000. If the alternatives are
considered to last indefinitely, the rate of return on the increment of investment is
closest to:
a. 25%/year
b. 20%/year
c. 21%/year
d. 12%/year
n is infinity, use i = ∆A/∆P
i* = 25,000/100,000
= 0.25 (25% per year)
Answer is (a)
6.68 EPC, Inc. uses a MARR of 12% per year compounded semiannually. The company
is evaluating two new processes for expanding its epoxy resin operations. The cash
flows associated with each process are shown below. In evaluating the processes on
the basis of an ROR analysis, the incremental investment rate of return equation to
use is:
42
Alternative
I J
First cost, $ −420,000 −520,000
AOC, $/year −15,000 −12,000
Life, years 3 3
a. 0 = −100,000 + 3000(P/A,Δi*,3) + 1000(P/F,Δi*,3)

b. 0 = −420,000 − 15,000(P/A,Δi*,3) + 5000(P/F,Δi*,3)
c. 0 = −520,000 − 12,000(P/A,Δi*,3) + 6000(P/F,Δi*,3)
d. 0 = −100,000 − 3000(P/A,Δi*,3) + 1000(P/F,Δi*,3)
Answer is (a)
6.69 Jewel-Osco is evaluating three biometric systems that identify customers by a

finger scan and immediately deduct the amount of the bill directly from their
checking accounts. The alternatives were ranked according to increasing initial
investment and identified as alternatives A, B, and C. Based on the incremental
rates of return shown and the MARR of 16% per year, the alternative to select is:
a. A
b. B
c. C
d. DN
Comparison Δi*, %
A vs. DN 23.4
B vs. DN 8.1
C vs. DN 16.6
B vs. A −5.1
C vs. A 12.0
C vs. B 83.9
Only A and C have overall ROR > MARR of 16%
C to A: ∆i* = 12.0% ∆i* < MARR Eliminate C; select A
Answer is (a)
43
6.70 For the cash flows shown, the correct equation for F2 using the ROIC method at the
reinvestment rate of 20% per year is:
a. F2 = [10,000(1 + i″) + 6000](1.20) − 8000
b. F2 = [10,000(1.20) + 6000(1 + i″)](1.20) − 8000
c. F2 = [10,000(1.20) + 6000](1.20) − 8000
d. F2 = [10,000(1.20) + 6000](1 + i″) – 8000
Year Cash Flow, $
0 10,000
1 6,000
2 −8,000
3 −19,000
Answer is (c)
6.71 The net cash flows associated with the manufacture and sale of stabilizer parts for
Stratolaunch, the world’s largest airplane with a 385-foot wingspan (longer than an
American football field), are shown. The NCF series indicates the possibility of
more than one i* value. If the borrowing rate is 10% per year and the reinvestment
rate is 15% per year, the external rate of return per year using the MIRR approach is
closest to:
a. 14.8%
b. 15.1%
c. 16.6%
d. 20.3%
Year NCF, $1000
0 −50
1 +20
2 +40
3 −15
4 +30
PW0 = −50 −15(P/F,10%,3)

= −50 −15(0.7513)
= $−61.27
44
FW4 = 20(F/P,15%,3) + 40(F/P,15%,2) + 30
= 20(1.5209) + 40(1.3225) + 30
= $113.32
113.32 = 61.27(F/P,i′,4)
(F/P,i′,4) = 1.8495
i′ = 16.6%
Answer is (c)
6.72 If during an ROR evaluation of two mutually exclusive alternatives, multiple i*

values are indicated by the rule of signs and the determination of the exact ROR
value is not necessary, a way to avoid extra ROR computations is to use the MARR
and calculate the:
a. PW
b. AW
c. FW
d. Any of these
Answer is (d)
6.73 Assuming there are two i* values determined when an ROR analysis of a
nonconventional cash flow series is performed, one guideline for retaining and
discarding i* values is:
a. Take the average of the two i* values as the ROR
b. Retain the i* > 0, if one is positive and one is negative
c. Retain the larger i* value, if both are positive
d. Retain the smaller i* value, if both are positive
Answer is (b)
45

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Solutions to end-of-chapter problems

Basics of Engineering Economy, 3rd edition

6.1 What does a rate of return of −100% mean?

A rate of return of −100% means that the entire investment is lost.

Total interest paid = 10,000(0.10)(5)

(a) Annual payment = [10,000/4 + 10,000(0.10)]

6.4 Spectra Scientific of Santa Clara, California, manufactures Q-switched solid-state

Annual payment = 60,000,000(A/P,8%,5)

Balance after payment = 64,800,000 – 15,027,600

(a) This the capital recovery amount at 3%.

(b) For interest on principal, interest and payment are:

Interest each year: 0.03(1,000,000) = $30,000

For unrecovered balance, annual payment is:

This is the same as the CR calculated above.

(c) For interest on principal:

Balance after first payment = 1,000,000 + 1,000,000(0.03) – 280,000

For unrecovered balance:

Balance after first payment = 1,000,000 + 1,000,000(0.03) – 269,030

Difference = 769,970 – 750,000

For interest on principal:

Interest each year is 0.10(1,000,000) = $100,000

For unrecovered balance:

Payment each year = 1,000,000(A/P,14%,5)

Total interest paid = 291,280(5) – 1,000,000

Difference = 500,000 – 456,400

Factors: 2500(200) = 1,900,000(A/P,i*,5)

From tables, i* is between 9% and 10%; close to 10% per year

Spreadsheet: Using = RATE(5,2500*200,−1900000) display an i* of 9.91% per year

0 = −35,000 + 9000(P∕A,i*,5) + 8000(P∕F,i*,8).

(a) Factors: PW relation 0 = − 35,000 + 9000(P/A,i*,5) + 8000(P/F,i*,8)

Try 12%: − 35,000 + 9000(3.6048) + 8000(0.4039) = $674.40 > 0 too low

Interpolation yields i* = 12.68% per period

Spreadsheet: Enter cash flows in cells B1:B9, with zeros in B7 and B8

(a) 0 = −149,333 + (34,500 – 28,500)(P/A,i*,30)

(b) Nominal per year = 1.25(12) = 15%

Effective i* = (1 + 0.15/12)12 – 1 = 0.1608 (16.08% per year)

(a) Factors: Move all cash flows to year 0. In $1000 units,

0 = −125 – 7.5(P/F,i*,1) + 84(P/F,i*,2) + 78(P/F,i*,3)

Interpolation yields i* = 8.68% per year

(b) Spreadsheet: Enter cash flows for years 0 to 3 in cells B1:B4

Function: = IRR(B1:B4) displays an i* of 8.67%

6.11 Chemco Enterprises is the manufacturer of Ultra-Dry, a hydrophobic coating that

0 = −30,000 + (27,000 – 18,000)(P/A,i%,5) + 4000(P/F,i%,5)

6.12 A graduate of NMSU who started a successful business wanted to start an

(100,000 – 10,000)i* = 10,000

(a) Factors: PW relation

Try 14%: $0.25 > 0 too low

(b) Spreadsheet: Using = IRR(B2:B8) the display is an i* of 14.55 %

(a) Tabulated factors; Move all amounts to year 10.

0 = −90,000(A/P,i*,24) – 0.014(6000) + 0.015(6000)(150)

Spreadsheet: = RATE(24,13416,−90000) displays an i* of 14.30% per month

0 = −130,000 + (78,000 – 49,000)(P/A,i*,8) + 1000(P/G,i*,8) + 23,000(P/F,i*,8)

Factors: Try at 15%: $20,132 > 0 too low

Interpolation results in i* ≈ 19.3%

Spreadsheet: Use the IRR function to display an i* of 19.17%

Overall ROR = [50,000(0.15) + 100,000(0.25)]/150,000

Part Incremental analysis Reason

Overall ROR = [300,000(0.30) + 200,000(0.25) + 500,000(0.20)]/1,000,000

(a) Size of investment in Z = 50,000 – 20,000

Spreadsheet: Using = RATE(5,2500200,−1900000) display an i of 9.91% per year

0 = −35,000 + 9000(P∕A,i,5) + 8000(P∕F,i,8).

(a) Factors: PW relation 0 = − 35,000 + 9000(P/A,i,5) + 8000(P/F,i,8)

0 = −125 – 7.5(P/F,i,1) + 84(P/F,i,2) + 78(P/F,i*,3)

0 = −130,000 + (78,000 – 49,000)(P/A,i,8) + 1000(P/G,i,8) + 23,000(P/F,i*,8)

(a) Factors: 0 = −4600 + 1100(P/A,∆i,9) +2000(P/F,∆i,10)

(a) Factors: 0 = −770,000 + 43,000(P/A,∆i,20) + 77,000(P/F,∆i,20)

(a) 0 = −56,000(A/P,∆i,9) + 8900 + (12,000 – 8900)(A/F,∆i,9)

0 = −200,000(A/P,∆i,5) + 50,000 + 60,000(A/F,∆i,5)

A: 0 = −30,000(A/P,i,8) + 4000 + 1000(A/F,i,8)

B: 0 = −36,000(A/P,i,8) + 5000 + 2000(A/F,i,8)

D: 0 = −53,000(A/P,i,8) + 10,500 − 2000(A/F,i,8)

D vs C: 0 = −12,000(A/P,∆i,8) + 2,500 − 2500(A/F,∆i,8)

(a) 8 vs. DN: 0 = −30,000(A/P,∆i,5) + (26,500 – 14,000) + 2000(A/F,∆i,5)

10 vs. 8: 0 = −4000(A/P,∆i,5) + (14,500 – 12,500) + 500(A/F,∆i,5)

15 vs. 10: 0 = −4000(A/P,∆i,5) + (15,500 – 14,500) + 500(A/F,∆i,5)

20 vs. 10: 0 = −14,000(A/P,∆i,5) + (19,500 – 14,500) + 1000(A/F,∆i,5)

25 vs. 20: 0 = −9000(A/P,∆i,5) + (23,000 – 19,500) + 1100(A/F,∆i,5)