ENGR.ECONOMY CUSTOM FOR TAMU ISEN 667
ENGR.ECONOMY CUSTOM FOR TAMU ISEN 667
8th Edition
ISBN: 9781307584394
Author: Blank
Publisher: MCG/CREATE
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Chapter 12, Problem 27P

(a):

To determine

Calculate the internal rate of return.

(a):

Expert Solution
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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%.

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