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Module 11h IRR Project Compare

The document discusses using internal rate of return (IRR) to compare engineering project alternatives. It provides examples of using IRR to: [1] Compare two projects, [2] Determine whether to purchase an automated or mechanical machine, and [3] Evaluate which machinery acquisition option is most cost effective. IRR is used to select projects or options that exceed the minimum acceptable rate of return.

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Carljohari Hussein Ariff
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17 views12 pages

Module 11h IRR Project Compare

The document discusses using internal rate of return (IRR) to compare engineering project alternatives. It provides examples of using IRR to: [1] Compare two projects, [2] Determine whether to purchase an automated or mechanical machine, and [3] Evaluate which machinery acquisition option is most cost effective. IRR is used to select projects or options that exceed the minimum acceptable rate of return.

Uploaded by

Carljohari Hussein Ariff
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MODULE 11 Part H

Project Management and Economy-


Engineering economic decision making –
Internal Rate of Return for project comparison
Expected Outcomes
After completing this module, you should be able to describe: the interest and its
equivalent related to engineering cost
• IRR may utilize as a selection tool of several project
opportunity. The IRR principle for selection is based on;
– Decision making on several project comparison (project M vs. project
G)
– Comparison of cash flow between project (project A - B or B - A)
– Most of the time the initial project analyze is a project with the less
annual worth (A) value which existed in the comparison

2
Example 1
Example - Compare the IRR between project A and B as shown
next.

• Accepting project B will saving 1.2k yearly for operation


expenditure.
3
Example 2
• Example - Compare the difference between purchasing and
operating of machine operated by mechanical and automation
as given table (Minimum Acceptable Rate of Return, MARR =
10%).
Mechanical (A) Automation (B)

Purchasing cost, $ 8000 13000

Annual maintenance, $ 3500 1600

Salvage value, $ 0 2000

Life years 10 5

4
Example 2
Solution

• NPVB-A = 0
• -(13-8)k – (1.6-3.5)k (P/A, i, 10) – (13-2)k (P/F, i, 5) + 2k (P/F, i, 10) = 0
• -5k + 1.9k (P/A, i, 10) – 11k (P/F, i, 5) + 2k (P/F, i, 10) = 0
When i, % P/A P/F NPV
10 5 10
11 5.8892 0.5935 0.3522 0.36538
12 5.6502 0.5674 0.3220 0.13798
13 5.4262 0.5428 0.2946 -0.07182 5
Example 2
• Then, 12% 0.13798

i 0

13% -0.07182

𝑖−12 0−(0.13798)
• =
13−12 −0.07182−(0.13798)
• i = 12.66% ∴ I > MARR so we accept B – A proposal and buying
machine B

6
Example 3
• Example - Compare the value of machinery acquisition as given
table. Then select which machinery is best suit for company’s
cost effectiveness base on MARR = 10%.
A, buy B, rent C, lease D, outsource

Acquisition cost, $ -200k -275k -190k -350k

Cash flow yearly, $ 22k 35k 19.5k 42k

Life, years 30 30 30 30

7
Example 3
Solutions
• C – A – B – D (initial arrangement of which machine Annum
cost less)

8
Example 3
Machinery C, NPV = 0

-190k +19.5k (P/A, i, 30) = 0

i, % P/A NPV

9 10.2737 10.33715

10 9.4269 -6.17545

9% 10.33715

• Then, i 0

10% -6.17545

𝑖−9 0−(10.33715)
• =
10−9 −6.17545−(10.33715)
• i = 9.63% <10 % MARR ∴ Reject purchasing of C

9
Example 3
Machinery A, NPV = 0

-200k + 22k (P/A, i, 30) = 0

i, % P/A NPV

10 9.4269 7.3918

11 8.6938 -8.7364

• Then, 10% 7.3918


i 0

11% -8.7364

𝑖−10 0−(7.3918)
• =
11−10 −8.7364−(7.3918)
• i = 10.46% >10 % MARR ∴ Accept purchasing of A

10
Example 3

17% 0.7822

• Then, i
18%
0
-3.2816

𝑖−17 0−(0.7822)
• =
18−17 −3.2816−(0.7822)
• i = 17.19% >10 % MARR ∴ Accept purchasing of B
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Example 3

• Then,
8% 3.8046
i 0
𝑖−8 0−(3.8046) 9% -3.0841
• =
9−8 −3.0841−(3.8046)
• i = 8.55% <10 % MARR ∴ Reject purchasing of D
• So, overall comparison shows that machinery B is worth to acquire to.

12

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