ROR Analysis of Single AlternativeROR Analysis of Single Alternative

Chapter 7

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Minimum attractive rate of return (ROR)• Percent interest rate= interest accrued per unit time/original

amount *100% = (current amount – original amount) or Profit divided by

original investment multiplied by 100%• Interest rate: used in borrowing and lending to state the

factor• ROR: used when estimating the profitability of a proposed

alternative.• Reasonable rate for investment is called minimum attractive

rate of return. (MARR)• ROR of a project must meet or exceed MARR to be financially

viable.– MARR or hurdle rate must be stated upfront in evaluating alternatives– The alternative closest to MARR should be selected.

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Evaluating Projects with the IRR

• IRR=i>= MARR…Project is Accepted• IRR=i’<MARR ...Project is Rejected

Example 7.1

Example

Rate of Return (ROR)• PWcost = PWincome or AWcost = AWincome

• 0= - PWcost + PWincome

• An alternative is viable if i* >= MARR

Example 7.2

Example 7.2

• i* is between 4 and 5%• At t = 5% • 0 = - 500,000 + 1O,OOO(P/A,5%, 10) + 700,000(P/F,5%, 10) =>

0 < $6946• The result is positive, indicating that the return is more than

5%. Try i = 6%.• o = - 500,000 + I O,OOO(P I A,6%, 10) + 700,000(P I F,6%, 10)

=> 0 > $-35,519

Example 7.2

Multiple Rate of Return Values• Example 7.4

Example 7.4