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ADAMA SCIENCE AND TECHNOLOGY UNIVERSITYSCHOOL OF CIVIL ENGINEERING AND ARCHITECTURE
DEPARTMENT OF CIVIL ENGINEERING
Course Title: ENGINEERING ECONOMICS
Course Code: CEng 5301
Lecturer: Natnael Fantu (M.Sc.)
Credit Hrs. 3
E-Mail: natifanicon@gmail.com
Program: 5th year Civil Eng.
A/Y & Sem.: 2020/21 Second Sem.
,ASTU Engineering Economics Compiled By: Nati
CHAPTER FIVE
Rate of Return
and
Payback Period
Instructor : Natnael Fantu
August, 2021
,ASTU Engineering Economics Compiled By: Nati
5.1 Rate of Return
Rate of return:- The rate of return technique is one of the
methods used in selecting an alternative for a project. In
this method, the interest rate per interest period is
determined, which equates the equivalent worth (either
present worth, future worth or annual worth) of cash
outflows (i.e. costs or expenditures) to that of cash
inflows (i.e. incomes or revenues) of an alternative. The
rate of return is also known by other names namely
Internal rate of return (IRR), profitability index etc.
It is basically the interest rate on the unrecovered
balance of an investment which becomes zero at the end
of the useful life or the study period.
, ASTU Engineering Economics Compiled By: Nati
5.1.1 Return on Investment
Rate of Return is termed as internal rate of return, yield,
marginal efficiency of capital.
Definition 1
Rate of return is the interest earned on the unpaid balance of
an amortized /repaid/ loan.
Suppose that a bank lends 10,000Birr,which is repaid in
installments of 4,021Birr at the end of each year for three
years. How would you determine the interest rate that the
bank charges on this transaction?
10,000 = 4021(P/A,i,3)
10,000 = 4021{(1+i)-1 + (1+i)-2 + (1+i)-3}
Let (1+i)-1 = X
Therefore, 10,000/4021 = X + X2 + X3
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