Engineerig Econoomy - Lecture 7 - Chapter 7
Engineerig Econoomy - Lecture 7 - Chapter 7
Chapter 7
1 0 0 % i*
In terms of investment, a return of I = -100% means the
entire amount is lost.
AW disbursements = AW receipts
0 = - AWD + AWR
– Select the values of i by trial and error until the equation
is balanced.
$500
0 1 2 3 4 5
PW=0
0 1 2 3 4 5 6 7 8 9 10
$200,000
0 =-200,000 +15,000(P/A,i*,10) + 300,000(P/F,i*,10)
Trial and error until the equation is balanced .
Multiply the $15,000 Annuity by 10 to transform to future,
200000 = 450000(P/F,I,10)
(P/F,I,10) = 0.444
(the roughly estimated for I is between 8%, 9%
i=9% , 0 =-200,000 +15,000(P/A,9%,10) + 300,000(P/F,9%,10)
0< $22,986, the result is positive, indicating the return is more than 9%, try 11%
i=11%, 0 =-200,000 +15,000(P/A,11%,10) + 300,000(P/F,11%,10)
0 > $-6002
22,986- 0
i* 9 (2) 9 1.58 10.58%
22,986- (-6002) 9
April, 2023
Dr. Mansour Abou Gamila
Example
Swagelok Enterprises is a manufacturer of miniature fittings and
valves. Over a 5-year period, the costs associated with one product
line were as follows: first cost of $30,000 and annual costs of
$18,000. Annual revenue was $27,000, and the used equipment was
salvaged for $4000. What rate of return did the company make on
this product?
Solution:
0 = -30,000 + (27,000 – 18,000)(P/A,i%,5) + 4000(P/F,i%,5)
0 = -30,000+9,000(P/A, i%,5) +4,000(P/F, i%,5) $4,000
I = 10%, - -30,000+9000(3.791)+4000(0.6209) = 6,602 i* = ?
I =15 -30,000+9000(3.352)+4000(0.4972) = 2156 $27,000
1= 18% -30,000+9000(3.127)+4000(0.4371) = -108.6
Solve by interpolation 0 1 2 3 4 5
i= 15 + [(2156-0)/(2156-(-108.6))](3)
i* = 17.85 % $18,000
$30,000
April, 2023 Dr. Mansour Abou Gamila 11
Example
In 2010, the city of Houston, Texas, collected $24,232,372 in fines from
motorists because of traffic violations caught by red-light cameras. The
cost of operating the system was $8,432,372. The net profit, that is, profit
after operating costs, is split equally (that is, 50% each) between the city
and the operator of the camera system. What will be the rate of return over
a 3-year period to the contractor that paid for, installed, and operates the
system, if its initial cost was $20,000,000 and the profit for each of the 3
years is the same as it was in 2010?
Profit = (24,232,372 - 8,432,372)(0.5) = $7,900,000
0 = -20,000,000 + 7,900,000(P/A,i,3)
(P/A,i,3) = 2.53
Find i from equation, table, or spreadsheet
i = 9%
Example
A plaintiff in a successful lawsuit was awarded a judgment of
$4800 per month for 5 years. The plaintiff needs a fairly large
sum of money now for an investment and has offered the
defendant the opportunity to pay off the award in a lump-sum
amount of $110,000. If the defendant accepts the offer and pays
the $110,000 now, what rate of return will the defendant have
made on the “investment”? Assume the next $4800 payment is
due 1 month from now.
0= -110000+4800(P/A, I, 60)
(P/A, I, 60) = 22.91667
Using the formula
(1 i ) n 1
P A n
fo r i 0
i (1 i )
I = 3.932 per month