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

Use of the spreadsheet will give us the same answer.

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Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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