## Example

Let us see what the ROR is for the problem of Example 2.1 using the netted cash flow diagram. Assuming an unknown interest rate i*, we can write the NPW as NPW - -24000 \ 4(500 (P/A, i*. 3) >-19600 (P/F, \\ 4) By definition ROR is the interest rate that makes NPW = 0.

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24,000

To determine ROR, we have to try several values for i* and see which one makes NPW = 0. If the value of ROR is higher than the MARR, then the project is good.

Calculation of i* from the above equation is not easy, and we have to use trial and error. To do this, we have to arbitrarily pick several (at least three) values for i* and calculate the corresponding value for NPW from the above equation. We can then graph these values and find the value of i* from the point that NPW value intersects the interest rate axis.

This is a cumbersome j ob; fortunately, there are financial calculators that perform this. Almost all spreadsheet programs can perform this calculation as well. In the case of this particular example, the answer is