(a):
(a):

Explanation of Solution
Table -1 shows the cash flow.
Table -1
Year | Net cash flow (NC) (in 1,000 units) |
0 | 2,000 |
1 | 1,200 |
2 | -4,000 |
3 | -3,000 |
4 | 2,000 |
The investment rate (i) is 30%.
The initial year future value (FW0) of the cash flow is calculated as follows:
The future worth of the project at initial year is 2,000.
The first year future value (FW1) of the cash flow is calculated as follows:
The future worth of the project at year 1 is 3,800.
The second year future value (FW2) of the cash flow is calculated as follows:
The future worth of the project at year 2 is 940.
The third year future value (FW3) of the cash flow is calculated as follows:
The future worth of the project at year 3 is -1,778.
The third year future value becomes negative. Thus, the next year cash flow should use the external
The future worth of the project at year 4 is 222-1,778E.
The external rate of return is calculated by equating the fourth year cash flow with zero.
Thus, the external rate of return is 12.49%.
(b):
Calculation of EROR (expected rate of return).
(b):

Explanation of Solution
The borrowing rate (b) is 10%. The negative cash flows are borrowing amount. The present worth of the negative cash flow (PW) is calculated as follows:
The present worth of the negative cash flow (borrowing) is -$5,559.73.
The investment rate (i) is 30%. The positive cash flows are investment amount. The time period (n) is 4. The future worth of the positive cash flow (FW) is calculated as follows:
The future worth of the positive cash flow (investment) is $10,348.8.
The time period (n) is 4. The value of EROR (E) is calculated as follows:
The value of EROR is 16.8%.
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Chapter 7 Solutions
ENGINEERING ECONOMY DIGITAL ACCESS
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