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EGB387 W7 Lecture - Rate of Return - Coggle Diagram
EGB387 W7 Lecture - Rate of Return
Minimum Attractive Rate of Return
MARR is a reasonable rate of return (%) established for evaluating and selecting alternatives
An investment is justified economically if it is expected to return at least the MARR
Interpretation of ROR
Rate paid or earned on unrecovered balance of money such taht final payment brings balance to exactly zero with interest considered.
Numerical value of ROR can range from -100% to infinity
ROR can be determined using PW, AW, or FW relation set to zero
ROR using Present Worth
Guess at a rate and try it
Adjust and interpolate
Check i > MARR (Viable)
How to calculate ROR
To determine ROR, find the i* value in the relation:
PW = 0 or,
AW = 0 or,
FW = 0
TRIAL AND ERROR APPROACH (refer flowchart)
Alternatively, another relation to determine i* with PW is:
PW(outflow) = PW(inflow)
For evaluation, a project is economically viable if:
i* >= MARR
Cautions when using the ROR
ROR is computationally more difficult than PW / AW
Can become a numerical analysis problem and the result is an approximation
Conceptually more difficult to understand
For analysis of two or more alternatives, when using ROR one must resort to a different analysis approach as opposed to the PW / AW methods
For ROR analysis of multiple alternatives, one must apply an incremental analysis appraoch
Unrecovered Investment Balance
ROR is the interest rate earned/charged on the Unrecovered investment balance of a loan or investment project
ROR is
not
the interest rate earned on the original loan amount or investment amount