Evaluating single project

The external rate of return must be used when:

• It is impossible to calculate the minimum acceptable rate of return

• 1. A project starts with cash outflow. 

• There are multiple internal rates of return.

• A project requires multiple investments and generates multiple benefits.

In which method, the excess revenue gets reinvested outside of the project and shortfalls are covered by borrowing from outside of the project?

• 1. Internal rate of return

• 1. External rate of return

• 1. Minimum attractive rate of return

• 1. The payback period

The project is not economically justified if: 

• 1. ERR = MARR

• 1. ERR < MARR

• 1. ERR > MARR

• 1. None of the above

What is the second step of calculating the ERR?

• 1. All net cash inflows are compounded to period N at ∈%.

• 1. All net cash outflows are compounded to time zero (the present) at ∈% per compounding period.

• 1. The external rate of return, which is the interest rate that establishes between the two quantities, is determined.

• 1. All net cash outflows are discounted to time zero (the present) at ∈% per compounding period.

A company's minimum attractive rate of return is generally equal to the rate of return that the company would receive if it invested its money someplace else with similar risk.

• True

• False

Cash prevails over all other forms of equity and is not considered as one of the Fundamental Principles of Engineering Economics.

• True

• False

The two primary factors in Engineering Economics are not "time" and "money".

• True

• False

The minimum acceptable rate of return (MARR) is

• an interest rate, which is equal to a current bank interest rate.

• an interest rate that must be earned for a project to be accepted.

• a highest interest rate among all alternative projects.

• an interest rate that allows an investor to recoup the investment.

• the least interest rate among all alternative projects.

The external reinvestment rate (∈) is 12% per year, and the MARR equals 15%

Year   Cash Flows

0            5,000

1           −7,000

2             2,000

3             2,000

Calculate the net cash outflows  

• 1. $7,000(P/F, 12%, 1) = 6,250

• 1. $5,000(P/F, 12%, 2) = 3,985

• 1. $7,000(P/F, 12%, 1) = 5,580

• 1. $5,000(P/F, 12%, 1) = 4,460

The external reinvestment rate (∈) is 12% per year, and the MARR equals 15%

Year   Cash Flows

0            5,000

1           −7,000

2             2,000

3             2,000

Calculate the net cash inflows

• 1. $5,000(F/P, 12%, 3)+$2,000(F/P, 12%, 1) + $2,000 = 11,264

  
  

• 1. $5,000(F/P, 12%, 3)+$2,000(F/A, 12%, 2) = 10.264

• 1. $5,000(F/P, 12%, 3)+$2,000(F/P, 12%, 3) + $2,000 = 11,834

• 1. $5,000(F/P, 12%, 3)+$2,000(F/A, 12%, 3) = 13,773