13-11-4 1

ME353 Second Exam Summary

Chapter 7 Rate of Return Analysis
!

i*: break-even interest rate

PW(i*)=PWCashInflows-PWCashOutflows=0
Excel: IRR(series,guess)
!

Decision rules under IRR criterion:

= >

!!! > ,

!!!

!!!
< ,
Be careful with do-nothing alternative
!

Find the true IRR for a mixed investment:

Step 1: identify the MARR (i.e external interest rate)

Step 2: calculate PBn:
PB0=A0
PB! =

! 1 + + ! , ! < 0
! 1 + + ! , ! > 0

PB! =

!!! 1 + + ! , !!! < 0

!!! 1 + + ! , !!! > 0

Step 3: set PBn=0 and solve for i

13-11-4 2

Chapter 6 Annual Equivalence Analysis

!

AE(i)=PW(i)(A/P,i,N)

Decision Rules under AE criterion:

> 0,
= 0,
< 0,
:

: ()

Be careful with unit-profit or unit-cost calculation

!

Annual Equivalent Worth= Annual Equivalent Saving-Annual Equivalent Cost

Annual Equivalent Cost=Capital Costs + Operating Costs

Equivalent Annual Capital Cost=Capital Recovery Cost >>CR(i)=(I-S)(A/P, i, N) + iS
Equivalent Annual Operating Costs>>OC i =

!
!!
(
!!! ! 1 +
!"!#$ !" !" !"#$%&'() !"#$

, , )

13-11-4 3

Chapter 5 Present Worth Analysis

!

Payback period v.s. discounted payback period>>(discounted)cumulative cash flow=0

Excel: NPV(MARR,series) note: the NPV function discounts the initial value.>>use NPV(1+MARR) or A0+NPV(A1:AN)
!

Decision Rules under PW criterion:

> 0,
= 0,
< 0,
=
<


>
. .
Analysis period: study period or planning horizon
Service period: time span over which the service of an investment will be needed
Note: always compute the PW for each project over the required service period

13-11-4 4

Chapter 4 Inflation
General inflation rate>> ! = ! (1 + )!
Actual Dollars (An) v.s. Constant Dollars (An)>> ! = !! (1 + )!
Market interest rate i v.s. inflation-free interest rate i
Constant dollar analysis>>! =

!!!
(!!! ! )!

!"#$%&' !" !"#$%&#% $

Actual dollar analysis>>! =

! (1 + )!!

(1 + ! )!! = ! (1 + )!! = ! + + !

!"#$%&'( !" !"#$%&#% $

13-11-4 5

Useful formulas
(1 + )! 1

(1 + )! 1
, , =
(1 + )!
, i, N =

, , =
( , , ) =

(1 + )!
(1 + )! 1
(1 + )! 1
! (1 + )!

! , , , =

To be completed..

1 (1 + )! (1 + )!!

!
, =
1+