Engineering Economy
Engineering Economy
8th Edition
ISBN: 9780073523439
Author: Leland T Blank Professor Emeritus, Anthony Tarquin
Publisher: McGraw-Hill Education
bartleby

Videos

Question
Book Icon
Chapter 12, Problem 27P

(a):

To determine

Calculate the internal rate of return.

(a):

Expert Solution
Check Mark

Explanation of Solution

The initial investment (IN) is $750,000. Net income (NY) is $135,000 per year. Time period (n) is 10. MARR (i) is 12%.

The internal rate of return (ir) can be calculated using the following formula:

IN=NY((1+ir)n1ir(1+ir)n)750,000=135,000((1+ir)n1ir(1+ir)n)((1+ir)101ir(1+ir)10)=750,000135,000((1+ir)101ir(1+ir)10)=5.5556

Substitute ir as 0.12 by trial and error method in the above calculation.   

((1+0.12)1010.12(1+0.12)10)=5.5556(3.105810.12(3.1058))=5.5556(2.10580.3727)=5.55565.6501>5.5556

The calculated value is less than the present value factor to the annual value. Thus, increase the ir value to 0.124.

((1+0.124)1010.124(1+0.124)10)=5.5556(3.218910.124(3.2189))=5.5556(2.21890.3991)=5.55565.55985.5556

Since the calculated value is equal to the present value factor to the annual value, the value of ir is confirmed as 12.4%.

The value PI can be calculated as follows:

PI=NY((1+i)n1i(1+i)n)IN=135,000((1+0.12)1010.12(1+0.12)10)750,000=135,000(3.105810.12(3.1058))750,000=135,000(2.10580.3727)750,000=135,000(5.6501)750,000=1.02

The value of PI is 1.02.

The value PW can be calculated as follows:

PW=IN+NY((1+i)n1i(1+i)n)=750,000+135,000((1+0.12)1010.12(1+0.12)10)=750,000+135,000(3.105810.12(3.1058))=750,000+135,000(2.10580.3727)=750,000+135,000(5.6501)=750,000+762,763.5=12,763.5

The present wroth (PW) is $12,763.5.

(b):

To determine

The measures for which the project is economically justified.

(b):

Expert Solution
Check Mark

Explanation of Solution

The internal rate of return is greater than MARR. PI is greater than 1 and the present worth is greater than 0. Thus, the project is economically justified by these three measures.

(c):

To determine

Calculate the breakeven rate of interest.

(c):

Expert Solution
Check Mark

Explanation of Solution

The breakeven interest rate can be calculated using the following spreadsheet function:

= RATE(10,135000,-750000)

The above function gives the value of 12.4148%. Thus, the breakeven interest rate is 12.4148%.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Economics
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education
DATA GEMS: How to Access Income Data Tables and Reports From the CPS ASEC; Author: U.S. Census Bureau;https://www.youtube.com/watch?v=BWpVC-Clczw;License: Standard Youtube License