Calculate the
Explanation of Solution
Initial cost (C) is $130,000. Repayment in year 1 (R1) is 78,000 and increases (I) by $1,000 per year thereafter. Equivalent annual cost (AC) is $49,000. Time period (1) is 8.
Rate of return (i) can be calculated as follows:
Substitute the rate of return as 19% by trial and error method in the above Equation.
When the rate of return is substituted as 19%, the calculated value is greater than the initial cost. Thus, the rate of return increases to 19.17%.
The calculated value is nearly equal to initial cost with rate of return 19.17%. Thus, it is confirmed that the rate of return is 19.17%.
The spreadsheet function to calculate the rate of return is given below:
The rate of return is 19.17%.
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Chapter 7 Solutions
Engineering Economy
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