9 by:

Puspita Debrina Andriani

Industrial Engineering
Universitas Brawijaya
e-mail: debrina@ub.ac.id / debrina.ub@gmail.com
www.debrina.lecture.ub.ac.id
 1. • Analysis of Present Value ( Present
Worth)
2. • Uniform Series Analysis ( Annual
Worth)
3. • Analysis of future values ​( Future
Worth)
4. • Analysis of Rate of Return ( Rate of
Return )
5. • Analysis of the benefits / costs (B / C)

6. • Analysis Return Period ( Payback

Period)
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 OUTLINE

1.   Rate of Return (ROR)

1. • Definition

2. • Calculations and Examples

2.   Miscellaneous The ROR

1. • External Rate of Return (ERR)

2. • Explicit Reinvestment Rate of Return (errr)

3.   Multiple Rate of Return

4.   ROR Analysis Rises

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DEFINITION RATE OF RETURN ( ROR)

••• The interest rate that causes the balance between all the expenditure

and all revenue in a given period

• • An income level that resulted in the value of NPW ( net present worth) an

investment = 0

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CALCULATION ROR (1)

by:
§ • NPW : net present worth
§ • Ft : Cash flow in period t
§•N : Life of the project or the period of study of the project
§• i* : ROR value of the project or the investment

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CALCULATION ROR (2)
F t ( cash flow) could be worth + or -
à ROR equation:

Or

PW R : The value present worth of all income (positive cash flow) PW E

: The value present worth of all expenditures (negative cash flow) R t

: Net receipts which occurred in the period to t E t

: Net spending that occurred in the period to-t, including initial investment

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CALCULATION ROR (3)

Can be searched with a uniform series ( Annual worth)

EUAR - EUAC = 0

Where:
§ • EUAR ( equivalent uniform annual revenue)
uniform series which recognizes income (cash inflows) per year
§ • EUAC ( equivalent uniform annual cost)
uniform rows stating expenditures (cash flow) per year

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EXAMPLE (1)

Note the cash flow in

addition to, calculate the

ROR of cash flow in addition

to

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COMPLETION (1)

NPW = PW R - PW E = 0

= USD 150 million × (P / F, i%, 8) - Rp 50 million = 0 (P / F,

i%, 8) = 50/150 (P / F, i%, 8) = 0.333

When i = 12%, then (P / F, 12%, 8) = 0.4039 when i

= 15%, then (P / F, 15%, 8) = 0.3269 By

interpolation obtained i = 14.76% So ROR cash

flow is 14.76%

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 • • if any proceeds obtained directly reinvested
with the same level of ROR (used to increase
Internal Rate of
the capital of the project)
Return (IRR)

• • when every result obtained is invested in

External Rate of
other projects with different levels of ROR
Return (ERR)

Explicit • • used on issues where there is a single lump

sum investment followed by a positive net
Reinvestment Rate of cash flow uniforms
Return (errr)

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ERR (1)
••• when each the results obtained are invested in other
projects with different levels of ROR , ie projects with a
higher ROR
••• ERR consider external interest rate (e)
••• cash flow Exit converted into a period now with e%
interest rate per compounding period

• • cash flow entry converted to N period with an interest

rate of e%

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ERR (2)
Equation looking ERR or i '

Where:
E t: overspending on acceptance period t R t: excess of receipts
over expenditure period t N: the life of the project or the planning
horizon e: the interest rate on external investment

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ERR (3)
Equation looking ERR is graphically shown in the figure below

i '=?

E t: excess of expenditure over receipts in period t R t: excess of receipts

over expenditure in period t
The project is acceptable if i '> MARR companies

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EXAMPLE (2)

Note the cash flow of an investment project below. If MARR = e = 20% per
year. Calculate TSB ERR and whether the project is feasible?

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COMPLETION (2)

25 million (F / P, i%, 5) = 8 million (F / A, 20%, 5) + 5 million 25 million (F /

P, i%, 5) = 8 million (7.4416) + 5 million 25 million (F / P, i%, 5) = 64.5328

million

(F / P, i%, 5) = 64.5328 million / 25 million (F / P,

i%, 5) = 2.5813
i' = 20.88%

Because i '= 20.88%> MARR = 20%, then the project is accepted

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Errr (1)
Used on issues where there is
single lump sum investment, followed by a positive net
cash flow uniforms at the end of each period during the life
of the project TSB

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Errr (2)
calculation errr

Where:
R: annual revenue (uniform series) E: annual expenditure
(uniform series) P: an initial investment of S: N residual
value: the life of the project

e: the annual effective interest rate on alternative investment ( often value = MARR)

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EXAMPLE (3)

Note the cash flow of an investment project below. If MARR = e = 20% per year.
whether the project is feasible when they will be evaluated by the method Errr?

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COMPLETION (3)
R: 8 million / yr E:

P: 25 million S:

5 million N: 5

years e: 20%

Because Errr = 21.25%> MARR then the alternative is feasible

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MULTIPLE RATE OF RETURN

cash flow conventional there is only one value ROR cash flow unconventional ROR will

obtain the same amount or

fewer than the number of sign changes cumulative cash flow

Signs cumulative cash flow in the period Total

Type change
0 1 2 3 4 5 6 sign

conventional - + + + + + +1

conventional + + + - - - -1

Non-Conventional + + + - + + +2

Non-Conventional - + - - + + +3

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EXAMPLE (4)

600 million
Suppose a project is only 2
years old with cash flow as
follows.

Calculate ROR of the project

and decide whether the
project is feasible or not. 250 million

359.38 million

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COMPLETION (4.1)

Year-End Net Cash Flow There are two changes in sign of the cash flow

0 - 250.00 million
cumulative à may be obtained 2 value ROR
With value analysis present worth:
1 + 600.00 million
2 - 359.38 million

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COMPLETION (4.2)

Projects will be accepted if MARR is

between 15% to 25%

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ROR ANALYSIS OF INCREASED

Used to select alternatif2 nature mutually

exclusive à choosing the best alternative among the alternatives there
are also Known Incremental rate of return (IROR)

IROR is an interest rate (ROR) generated by

an additional ( incremental) the beginning of an alternative
investment when compared to other alternatives that require a
lower initial investment

IROR = ROR marginal (marginal ROR)

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ANALYSIS PROCEDURE ROR INCREASED

1.   ROR Calculate each alternative

2.   ROR compare each alternative by MARR, the alternative

waste when ROR <MARR

3.   Sort of existing alternatives based on the amount of the initial investment required
ranging from the smallest

4.   Calculate the addition of the initial investment and the addition of net cash flow from
investment alternative with the least to alternate with the next smallest investment, find
IROR of this increase

5.   IROR ≥ MARR à select alternatives that require a larger investment

IROR <MARR à select the alternative that requires a smaller investment

6.   Return to Step 5 to end up staying one alternative

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Example (5)

For the development of a supermarket, an investor

is considering five locations, namely A, B, C, D, and E. Data from the initial
investment and annual revenues alternative fifth in the table below. All
alternative was estimated to be 5 years. Determine the best alternatives
according to the ROR method is increased if MARR is 6% per year.

Alternative A B C D E

Investments (million) 400 100 300 200 500

Revenue / year 105 35 76 60 125

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COMPLETION (5.1)

1. Calculate each alternative ROR

alternative A

NPW = 105 (P / A, i%, 5) - 400 = 0 (P / A, i%, 5) =

400/105 = 3.81 à i ≈ 10%

alternative B alternative D

(P / A, i%, 5) = 100/35 = 2,86 à i ≈ 22% (P / A, i%, 5) = 200/60 = 3.33 à i ≈ 15.5%

alternative C alternative E

(P / A, i%, 5) = 300/76 = 3.95 à i ≈ 8.5% (P / A, i%, 5) = 500/125 = 4 à i ≈ 7.5%

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COMPLETION (5.2)

2. Compare each alternative ROR by MARR, the alternative waste when ROR <MARR (=
6%)

All alternatives RORnya> MARR => all alternatives included in the calculation IROR

3. Sort of existing alternatives based on the amount of the initial investment required ranging from the
smallest

Alternative B D C A E

Investments (million) 100 200 300 400 500

Revenue / year 35 60 76,105,125

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COMPLETION (5.3)
4.   Compare the alternatives, then find his IROR

Compare B with D
The additional investment jt = 200 - 100M = 100M Revenue /
year additional jt = 60 - 35 jt = 25M

IROR (B à D) 100 jt = 25M (P / A, i%, 5) (P / A,

i%, 5) = 100/4 = 25
i = 7,5%
Krn IROR (B à D) = 7.5%> MARR = 6%, choose the alternative with greater investment,
namely alternative D and Alternative B ill considered again

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PE Compare D with C Compare D to E additional = 300 Million

The additional investment jt = 300 - 200 Income jt jt = 100 / Investment Income / year = 65 jt IROR

year additional jt = 76 - 60 = 16 jt jt additional (D -> E) (P / A, i%, 5) = 300/65 = 4.4

NYEL
IROR (D -> C) i = 4.25% Krn IROR < MARR, select alternative

(P / A, i%, 5) = 100/16 = 6,25 i = - D

(negative)

Krn IROR = negative, select alternative D

ESAIAN
Compare D with A = 200 jt additional So the best alternative is alternative D
(5.4)
Investment Income / year = 45 jt IROR

additional (D -> A)

(P / A, i%, 5) = 200/45 = 4.4 i =

4.25%

Krn IROR <MARR, select alternative D

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