Solve this problem on the solution of this ror ( rate of return ) problem
- 1. My Presentation Topic is :- Solve this problem on the solution of this ROR ( Rate of Return ) problem Course Name: Project Planning and Management Course Code : CE 403 Final Term Submitted By Mohammad Khasrul Alam ID No. : 003-18-23 Department Of Civil Engineering Southern University Bangladesh. Submitted To Mohammad Ayanul Huq Chowdhury Lecturer, Department Of Civil Engineering Southern University Bangladesh.
- 2. Rate of Return : Rate of return (ROR) is the rate paid on the unpaid balance of borrowed money, or the rate earned on the unrecovered balance of an investment, so that the final payment or receipt brings the balance to exactly zero with interest considered. PWD= costs or disbursements PWR= incomes or receipts 𝑃𝑊𝐷=𝑃𝑊𝑅 0=−𝑃𝑊𝐷+𝑃𝑊𝑅 𝐴𝑊𝐷=𝐴𝑊𝑅 0=−𝐴𝑊𝐷+𝐴𝑊𝑅 If i* ≥ MARR, accept the alternative as economically viable. If i* < MARR, the alternative is not economically viable.
- 3. Problem : A small industrial contractor purchased a warehouse building for storing equipment and materials that are not immediately needed at construction job sites. The cost of the building was $A=350,000. He was expecting a saving of $B=7000 per year for 10 years and a net return of $C=497,000 in year 10. What rate of return did the contractor make on this investment? Given Data, $A=350,000 $B=7000 $C=497,000
- 4. Solution : Draw Cash Flow Diagram :
- 5. Continue… Use equation : 0=−𝑃𝑊𝐷+𝑃𝑊𝑅 0=−350,000+7,000𝑃/𝐴,𝑖∗,10+497,000(𝑃/𝐹,𝑖∗,10) P = $350,000, n = 10, and F = 10(7,000) + 497,000 = $567,000 » 350, 000 = 567,000 (P/F, i, 10) » (P/F, i, 10) = .620 The roughly estimated i is between 4% and 5%
- 6. Continue… Use the estimation procedure to determine I : Use 5% as the first trial because approximate rate for the P/F factor will be lower than the true value when the time value of money is considered … i =5% 0=−350,000+7,000(P/A,5%,10)+497,000(P/F,5%,10) » 0<$ 9167.03 Again, i= 6% 0=−350,000+7,000(P/A,6%,10)+497,000(P/F,6%,10) » 0>$−20957. 18
- 7. Continue… We get, y1 = 5.0 x1 = 9167.03 y= ? y2 = 6.0 x2 = -20957.18 x =0 Since the interest rate of 6% is too high, linearly interpolate between 5% and 6% 𝑖∗=5.0+ 0-9167.03 (6.0−5.0) (-20957.18)-9167.03 =5.0+0.30%=5.30% 5.30% rate of return did the contractor make on this investment. » i = 5.30% Answer
- 8. Thank You See you again any other class and any other presentation. End