Chap. 7
Chap. 7
Chap. 7
PW = 0 $ 8000
Solution:: The ROR equation, based on a PW
A = $ 7000 relation, is:
0 1 2 3
PW = -20,000 + 7000(P/A,i*,3) + 8000(P/F,i*,3) = 0
i* i1
i2 i1
P P1
P2 P1
i* 10
20 10
0 3418.5
642.05 3418.5
4
Multiple ROR Values
Multiple i* values may exist when there is more than one sign
change in net cash flow (CF) series.
Such CF series are called non-conventional
7-5
Plot of PW for CF Series with Multiple ROR Values
i* values at ~8%
and ~41%
7-6
Example: Multiple i* Values
Determine the maximum number of i* values for the cash flow shown below
Year Expense Income Net cash flow Cumulative CF
0 -12,000 - -12,000 -12,000
1 -5,000 + 3,000 -2,000 -14,000
2 -6,000 +9,000 +3,000 -11,000
3 -7,000 +15,000 +8,000 -3,000
4 -8,000 +16,000 +8,000 +5,000
5 -9,000 +8,000 -1,000 +4,000
Solution:
The sign on the net cash flow changes The cumulative cash flow begins
twice, indicating two possible i* values negatively with one sign change
Therefore, there is only one i* value ( i* = 8.7%)
7-7
Removing Multiple i* Values
Two new interest rates to consider:
Investment rate ii – rate at which extra funds
are invested external to the project
7-9
Example: EROR Using MIRR Method
For the nonconventional cash flow ,NCF, shown below, find the EROR by the MIRR
method if MARR = 9%, ib = 8.5%, and ii = 12%
Year 0 1 2 3
NCF +2000 -500 -8100 +6800
PW0(F/P,i’,3) + FW3 = 0
(2) Set future worth relation for last year n equal to 0 (i.e., Fn= 0); solve for i’’
7-12
Important Points to Remember
About the computation of an EROR value
EROR values are dependent upon the
selected investment and/or borrowing rates
Commonly, multiple i* rates, i’ from MIRR and
i’’ from ROIC have different values