Rate of Return Analysis in Engineering Economics

Rate of return analysis in Engineering Economics covers the following specific topics:

1. Basic notions of rates of return
• Mimimum aceptable rate of return
• Internal rate of return (IRR)
2. Calculations of IRR
• Single, simple investment
3. Consistencyof  IRR with other economic comparison methods (note Figure 5.4 "Present worth of cash flow for the proposal ... at different interest rates" in Riggs et al. (1998, pg. 171).)
4. IRR misconceptions
• ranking alternatives by individual IRR values (note Figure 5.5 "relationship of net worth and different discount rates" of Riggs et al. (1998, pg. 178).)
5. Nonsimple investment - more than one possible rate of return (note Figure 5.6 "Net present worth of a proposal with multiple roots for PW" of Riggs et al. (1998, pg. 182).)
6. Project Balance Method
7. Alternatives with unequal lives
8. Cost of capital concepts

Related Excel function of IRR
The following exhibits show how to use the IRR function of Excel to calculate internal rate of return:

Exhibit 1: Spreadsheet figures and comments (note that the range of irr covers figures from time 0[now] to end of the period [year 5])

Exhibit 2: Online Excel help information on IRR

A class discussion question:

References

1. Riggs, J.L., Bedworth, D.D. and Randhawa, S.U. (1998) "Chapter 5: Rate of Return Calculations" Engineering Economics, Mcgraw-Hill.
2. Cost of capital: http://www.investopedia.com/terms/c/costofcapital.asp#axzz1moqEvtak
3. Internal rate of return (video): http://www.youtube.com/watch?v=Mr8dpR0XmBc&feature=related