PENGGUNAAN ROR DAN

B/R

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UMM
Contoh Soal Rate of Return:

Contoh :
Vincent Gogh’s painting “Irises”
• John Whitney Payson membeli barang
seni ini seharga $80,000.
• John menjual kembali seharga $53.9
juta 40 tahun kemudian.
• Berapa rate of return dari investasi
John ? Teknik Mesin UMM
Rate of Return

 Diketahui: P =$80,000, $53.9 Juta

F = $53.9juta, and N = 40 tahun
 Cari : i
 Solusi:

0
40

$53.9 juta  $90.0001  i 

40
$80,000
i  17.69%

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 Arti Rate of Return

Pada 1970, ketika Wal-Mart Stores, Inc.

menjadi Perusahaan terbuka (go public),
suatu investasi dari 100 saham seharga
$1,650. Investasi tersebut akan menjadi
$13,312,000 pada 31 January 2000.

Berapa rate of return pada investasi

tersebut ?

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Solution: $13,312,000

0
30
$1,650
Diketahui: P = $1,650
F = $13,312,000
N = 30
Cari i:
F  P (1  i ) N

$13,312,000 = $1,650 (1 + i )30

i = 34.97% Rate of Return
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Seandainya anda menginvestasikan senilai ($1,650)
dalam rekening tabungan 6% per tahun. Kemudian
anda hanya memperoleh $9,477 pada January,
2000.

Apa arti dari 6% interest disini?

Ini adalah opportunity cost jika menyimpan uang

pada rekening tabungan, dan merupakan suatu
tindakan yang terbaik yang dapat dilakukan saat itu.
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Kemudian, pada tahun 1970, anda memperoleh tawaran
untuk investasi lain dengan interest lebih dari 6% untuk
investasi lain, anda akan mengambil investasi tersebut.

Oleh karena itu, 6% dipandang sebagai minimum

attractive rate of return (rate of return yang dibutuhkan).

Maka, anda dapat menetapkan aturan keputusan berikut

untuk memperoleh investasi yang diusulkan adalah
yang terbaik :
ROR > MARR
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Rate of Return

• Definisi 1: Rate of return (ROR) merupakan

interest rate yang diperoleh pada
unpaid balance dari angsuran suatu
pinjaman.

• Contoh: Sebuah bank meminjamkan $10,000

dan menerima pembayaran pertahun
sebesar of $4,021 selama 3 tahun.
Bank dikatakan memperoleh
penghasilan kembali (return of) 10%
dari pinjaman sebesar $10,000.
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Loan Balance Calculation:
A = $10,000 (A/P, 10%, 3)
= $4,021
Unpaid Return on Unpaid
balance unpaid balance
at beg. balance Payment at the end
Year of year (10%) received of year

0 -$10,000 -$10,000
1 -$10,000 -$1,000 +$4,021 -$6,979
2 -$6,979 -$698 +$4,021 -$3,656
3 -$3,656 -$366 +$4,021 0

A return of 10% on the amount still outstanding at the

beginning of each year
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Rate of Return:

• Definition 2: Rate of return (ROR) is defined

as break-even interest rate, i*, which equates the
present worth of a project’s cash outflows to the
present worth of its cash inflows.

• Mathematical Relation:
PW (i * )  PW (i * )cash inflows  PW (i * )cash outflows
0

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 Return on Invested Capital

• Definition 3: Return on invested capital is

defined as the interest rate earned on the
unrecovered project balance of an investment
project. It is commonly known as internal rate
of return (IRR).

• Example: A company invests $10,000 in a

computer and results in equivalent annual labor
savings of $4,021 over 3 years. The company is
said to earn a return of 10% on its investment of
$10,000.
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 Project Balance Calculation:
0 1 2 3
Beginning
-$10,000 -$6,979 -$3,656
project balance

Return on
-$1,000 -$697 -$365
invested capital

Payment
-$10,000 +$4,021 +$4,021 +$4,021
received

Ending project
-$10,000 -$6,979 -$3,656 0
balance
The firm earns a 10% rate of return on funds that remain internally
invested in the project. Since the return is internal to the project, we
call it internal rate of return.
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Period Project A Project B Project C
(N)
0 -$1,000 -$1,000 +$1,000

1 -500 3,900 -450

2 800 -5,030 -450

3 1,500 2,145 -450

4 2,000

Project A is a simple investment.

Project B is a nonsimple investment.
Project C is a simple borrowing.

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 Computational Methods
Direct Direct Trial & Computer
Solution Solution Error Solution
Method Method
Log Quadratic

n Project A Project B Project C Project D

0 -$1,000 -$2,000 -$75,000 -$10,000

1 0 1,300 24,400 20,000

2 0 1,500 27,340 20,000

3 0 55,760 25,000

4 1,500
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 Direct Solution Methods
• Project A • Project B
$1,300 $1,500
$1,000  $1,500( P / F , i ,4) PW (i )  $2,000   0
(1  i ) (1  i ) 2

$1,000  $1,500(1  i ) 4 1
Let x  , then
0.6667  (1  i ) 4 1 i
PW (i )  2,000  1,300 x  1,500 x 2
ln 0.6667
 ln(1  i ) Solve for x:
4
x  0.8 or -1.667
0101365
.  ln(1  i )
Solving for i yields
e 0.101365
 1 i
1 1
0.8   i  25%,  1667
.   i  160%
ie 0.101365
1 1 i 1 i
 10.67% Since  100%  i  , the project's i *  25%.

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Trial and Error Method – Project C

 Step 4: If you bracket the

 Step 1: Guess an interest solution, you use a linear
rate, say, i = 15% interpolation to approximate
 Step 2: Compute PW(i)
the solution
at the guessed i value.

PW (15%) = $3,553 3,553

0
 Step 3: If PW(i) > 0, then
increase i. If PW(i) < 0, -749
then decrease i.
15% i 18%
PW(18%) = -$749

 3,553 
i  15%  3%  
 3,553  749 
 17.45%
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Graphical Solution – Project D

 Step 1: Create a NPW plot

using Excel.
 Step 2: Identify the point
at which the curve crosses
the horizontal axis closely
approximates the i*.
 Note: This method is
particularly useful for
projects with multiple
rates of return, as most
financial softwares would
fail to find all the multiple
i*s.
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Aturan Keputusan Dasar

If ROR > MARR, terima

Aturan ini tidak berlaku untuk situasi dimana

invesrasi mempunyai ‘multiple rates of
return’

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Problem Multiple Rates of Return
$2,300

$1,000 $1,320

• Cari rate(s) of return:

$2,300 $1,320
PW (i)  $1,000  
1 i (1  i )2
0
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 1
Let x  . Then,
1 i
$2,300 $1,320
PW (i )  $1,000  
(1  i ) (1  i ) 2
 $1,000  $2,300 x  $1,320 x 2
0
Solving for x yields,
x  10 / 11 or x  10 / 12
Solving for i yields
i  10% or 20%
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NPW Plot for a Nonsimple Investment with Multiple Rates of
Return

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 Kalkulasi Kesetimbangan Proyek
i* =20%
n=0 n=1 n=2

Beg. Balance -$1,000 +$1,100

Interest -$200 +$220
Payment -$1,000 +$2,300 -$1,320

Ending Balance -$1,000 +$1,100 $0

Cash borrowed (released) from the project is assumed

to
earn the same interest rate through external investment
as money that remains internally invested.
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Critical Issue: Can the company be able to invest the money
released from the project at 20% externally in
Period 1?

If your MARR is exactly 20%, the answer is “yes”, because it

represents the rate at which the firm can always invest
the money in its investment pool. Then, the 20% is also true
IRR for the project.
.
Suppose your MARR is 15% instead of 20%. The assumption
used in calculating i* is no longer valid.

Therefore, neither 10% nor 20% is a true IRR.

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How to Proceed: If you encounter multiple
rates of return, abandon the IRR analysis
and use the NPW criterion (or use the procedures
outlined in Appendix A).

• If NPW criterion is used at MARR = 15%

PW(15%) = -$1,000
+ $2,300 (P/F, 15%, 1)
- $1,320 (P/F, 15%, 2 )
= $1.89 > 0
Investasi diterima
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Aturan Keputusan Untuk Nonsimple Investment

 Kemungkinan multiple RORs.

PW (i)
 Jika PW (i) plot looks seperti
berikut, maka, IRR = ROR.
i*
If IRR > MARR, Terima i

Jika PW(i) plot seperti berikut,

PW (i)


maka, IRR  ROR (i*).

• Dapatkan IRR sebenarnya atau i*
• Gunakan method PW

i* i

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Membandingkan Mutually Exclusive Alternatives
Berdasarkan IRR

• Issue: Dapatkah membuat ranking

‘mutually exclusive projects’ dengan
besaran
n
dari IRR? A1 A2
0 -$1,000 -$5,000

1 $2,000 $7,000

IRR 100% > 40%

PW (10%) $818 < $1,364

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Incremental Investment
Incremental
Investment
(A2 – A1)
n Project A1 Project A2

0 -$1,000 -$5,000 -$4,000

1 $2,000 $7,000 $5,000

ROR 100% 40% 25%

PW(10%) $818 $1,364 $546

• Assuming MARR of 10%, you can always earn that rate from other
investment source, i.e., $4,400 at the end of one year for $4,000
investment.

• By investing the additional $4,000 in A2, you would make additional

$5,000, which is equivalent to earning at the rate of 25%. Therefore,
the incremental investment in A2 is justified.
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Incremental Analysis (Procedure)

Step 1: Compute the cash flows for the difference

between the projects (A,B) by subtracting
the cash flows for the lower investment
cost project (A) from those of the higher
investment cost project (B).
Step 2: Compute the IRR on this incremental
investment (IRR B-A ).
Step 3: Accept the investment B if and only if

IRR B-A > MARR

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 Contoh - Incremental Rate of Return

n B1 B2 B2 - B1

0 -$3,000 -$12,000 -$9,000

1 1,350 4,200 2,850
2 1,800 6,225 4,425
3 1,500 6,330 4,830

IRR 25% 17.43% 15%

Diketahui MARR = 10%, project mana pilihan terbaik?

Bila IRRB2-B1=15% > 10%, dan juga IRRB2 > 10%, pilih B2.
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 IRR pada Increment Investment:
Tiga Alternatif
n D1 D2 D3 Step 1: Tetapkan IRR untuk tiap
proyek untuk mngeliminasi tiap
project yang gagal memenuhi
0 -$2,000 -$1,000 -$3,000
MARR

1 1,500 800 1,500 Step 2: Bandingkan D1 dan D2

berpasangan.
IRRD1-D2=27.61% > 15%,
2 1,000 500 2,000
pilih D1.

3 800 500 1,000 Step 3: Bandingkan D1 dan D3.

IRRD3-D1= 8.8% < 15%,
IRR 34.37% 40.76% 24.81% pilih D1.

Kesimpulannya D1 adalah alternatif

terbaik. Teknik Mesin UMM
 Incremental Borrowing Analysis

Principle: Decision Rule:

 If the difference in flow
(B-A) represents an i A B  BRR A B
*

increment of investment,
then (A-B) is an  If BRR B-A < MARR,
increment of borrowing. select B.
 When considering an  If BRR B-A = MARR,
increment of borrowing, select either one.
the rate i*A-B is the rate
we paid to borrow  If BRR B-A > MARR,
money from the select A.
increment.
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Borrowing Rate of Return

n B1 B2 B1-B2

0 -$3,000 -$12,000 +$9,000

1 1,350 4,200 -2,850

2 1,800 6,225 -4,425

3 1,500 6,330 -4,830

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Incremental Analysis for Cost-Only Projects

Items CMS Option FMS Option

Annual O&M costs:
Annual labor cost $1,169,600 $707,200
Annual material cost 832,320 598,400
Annual overhead cost 3,150,000 1,950,000
Annual tooling cost 470,000 300,000
Annual inventory cost 141,000 31,500
Annual income taxes 1,650,000 1,917,000
Total annual costs $7,412,920 $5,504,100
Investment $4,500,000 $12,500,000
Net salvage value $500,000 $1,000,000
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Incremental Cash Flow (FMS – CMS)
Incremental
n CMS Option FMS Option (FMS-CMS)

0 -$4,500,000 -$12,500,000 -$8,000,000

1 -7,412,920 -5,504,100 1,908,820

2 -7,412,920 -5,504,100 1,908,820

3 -7,412,920 -5,504,100 1,908,820

4 -7,412,920 -5,504,100 1,908,820

5 -7,412,920 -5,504,100 1,908,820

6 -7,412,920 -5,504,100
$2,408,820
Salvage + $500,000 + $1,000,000
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Solution:

PW (i) FMS  CMS  $8,000,000

$1,908,820( P / A, i,5)
$2,408,820( P / F, i,6)
0
IRRFMS  CMS  12.43%  15%,
select CMS.

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Ultimate Decision Rule:

If IRR > MARR, Accept

• Aturan berlaku untuk setiap situasi investasi.

• Dalam beberapa situasi,

IRR = ROR
tapi hubungan ini tidak dapat digunakan untuk
investasi dengan multiple RORs.

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Predicting Multiple RORs

- 100% < i *< infinity

• Net Cash Flow Rule of Signs

No. of real RORs (i*s)

<

No. of sign changes in the project

cash flows

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Example

n Net Cash flow Sign Change

0 -$100
1 -$20
2 $50 1
3 0
4 $60
5 -$30 1
6 $100 1
• No. of real i*s  3
• This implies that the project could have
(0, 1, 2, or 3) i*s but NOT more than 3.
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Accumulated Cash Flow Sign Test

Find the accounting sum of net cash flows at

the end of each period over the life of the
project
Period Cash Flow Sum
(n) (An ) Sn
0 A0 S0  A0
1 A1 S1  S0  A1
2 A2 S2  S1  A2

  
AN SN  SN 1  AN
N
If the series S starts negatively and changes sign
ONLY ONCE, there exists a unique positive i*.
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Contoh
n An Sn Perubanhan
tanda
0 -$100 -$100
1 -$20 -$120
2 $50 -$70
3 0 -$70
4 $60 -$10
5 -$30 -$40
6 $100 $60 1
• Jumlah tanda berubah = 1, indicating a unique i*.
• i* = 10.46%
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 $3,900
Contoh: $2,145
2
0 1 3

$1,000
$5,030

• Apakah ini simple investment?

• Berapa RORs (i*s) dapat diharapkan dari menguji
cash flows?
• Apakah Investasi ini mempunyai rate of return yang unik ?

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Contoh Soal-soal
Benefit Cost Ratio

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Contoh : Incremental Benefit-Cost Ratios

A1 A2 A3

I $5,000 $20,000 $14,000

B 12,000 35,000 21,000

C’ 4,000 8,000 1,000

PW(i) $3,000 $7,000 $6,000

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Solution
A1 A2 A3

BC(i) 1.33 1.25 1.40

Ranking Base A1 A3 A2

I +C’ $9,000 $15,000 $28,000

$21,000  $12,000
BC(i )2 1 
($14,000  $5,000)  ($1,000  $4,000)
 1.5  1, select A2.
$35,000  $21,000
BC(i )2  3 
($20,000  $14,000)  ($8,000  $1,000)
 1.08  1, select A2.
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General Procedure for Cost-Effectiveness Studies

Step 1: Establish the goals to be achieved by the analysis.

Step 2: Identify the imposed restrictions on achieving the goals, such
as budget or weight.
Step 3: Identify all the feasible alternatives to achieve the goals.
Step 4: Identify the social interest rate to use in the analysis.
Step 5: Determine the equivalent life-cycle cost of each alternative,
including research and development, testing, capital investment,
annual operating and maintenance costs, and salvage value.

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 Step 6: Determine the basis for developing the cost-effectiveness
index. Two approaches may be used;
 (1) the fixed-cost approach and
 (2) the fixed-effectiveness approach.
 If the fixed-cost approach is used, determine the amount of
effectiveness obtained at a given cost.
 If the fixed-effectiveness approach is used, determine the cost to
obtain the predetermined level of effectiveness.
 Step 7: Compute the cost-effectiveness ratio for each alternative based
on the selected criterion in Step 6.
 Step 8: Select the alternative with the maximum cost-effective index.

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 Cost-Effectiveness Decision Criterion

 Fixed Cost Approach  Fixed Effectiveness Approach

Maximize Effectiveness Minimize Cost

Subject to: Subject to:

Budget Constraint Must meet the minimum

effectiveness

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Case Study - Selecting an Weapon System

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Weapon System Alternatives
Alternative Aj Advantage Disadvantage Probability
of Kill

A1: Inertial navigation Low cost, mature Accuracy, target 0.33

system technology. recognition

A2: Inertial navigation Moderate cost, nature Target recognition 0.70

system: Global technology
positioning system
A3: Imaging infrared Accurate, target High cost, bunkered 0.90
(I2R) recognition target detection

A4: Synthetic aperture Accurate, target High cost 0.99

radar recognition

A5: Laser Accurate, target High cost, technical 0.99

detection/ranging recognition maturity

A6: Millimeter wave Moderate cost, Target recognition 0.80

(MMW) accurate

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 Life-Cycle Costs for Weapon Development
Alternative
Expenditures in Million Dollars
Phase Year A1* A2 A3 A4 A5 A6
0 $15 $19 $50 $40 $75 $28
FSD
1 18 23 65 45 75 32
2 19 22 65 45 75 33
3 15 17 50 40 75 27
4 90 140 200 200 300 150
5 95 150 270 250 360 180
IOC 6 95 160 280 275 370 200
7 90 150 250 275 340 200
8 80 140 200 200 330 170
PW(10%) $315.92 $492.22 $884.27 $829.64 $1,227.23 $612.70

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Cost-Effectiveness Index

Type Cost/Unit Probability of Cost/Kill Kill/Cost

Kill
A1 $31,592 0.33 $95,733 0.0000104

A2 49,220 0.70 70,314 0.0000142

A3 88,427 0.90 98,252 0.0000102

A4 82,964 0.90 83,802 0.0000119

A5 122,723 0.99 123,963 0.0000081

A6 61,370 0.80 76,713 0.0000130

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 $130,000 Unacceptable
region A5

120,000

110,000
Fixed cost
Cost/kill

100,000
A1 A3
90,000
Maximize
effectiveness A4
80,000
A6
A2
70,000
300 400 500 600 700 800 900 1000 1100 1200 1300
Present value of life cycle cost ($ million)
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