RATE OF RETURN ANALYSIS Bar Codes Give a Number; RFID Codes Tell a Story and May Become the Spies You Buy jhe shift from manual price tags, shipping labels, and baggage tags to bar codes revolutionized opera- tions by reducing costs and errors. The shift to Radio Frequency Identifica- tion (RFID) is revolutionizing operations again. A bar code speaks five or six times in ts lifetime; RFID codes can speak many times each second. RFID is in your car keys, the EZ Pass on your windshield, a rail pass in China, your new Smart Pass- port, a subway pass in Washington, DC, some employee IDs, and garment labels. RFID chips are used to tightly control inventory from razor blades to comput- ers and to monitor temperatures of Alaska Wild Seafood from packaging to restau- rant delivery. Today’s wholesalers, retail- cers, manufacturers, and military decision makers trust RFID technology to create real-time inventory tracking. In 2003, RFID tags cost about 30¢ each, which made them too expensive to embed in low- ‘cost products like soap and shaving c1 1m. RFID tags with batteries for tacking truckloads ‘or containers cost more than $1000, Today, a major manufacturer of RFID tags quotes a price of S¢ each for batches of at least a billion tags. Thus manufacturers of products from Jeans to shampoo are using RFID tags. Part of the story that RFID tags tell may be about the person who is wearing them. RFID tags emit data that can track and trace goods from the time they leave the manufacturingplant until you purchase them at your favorite retail store—and take them home. While the cost of an RFID tag for a garment may be down to pennies, what is the real cost and benefit to a company that may invest several milion dollars in technology to track items—and possibly the person wearing that item? sara Contributed by Oliver Hedgepeth, American Public University, author of RFID Metrics, CRC Press (2007) CT recente ce 1. A clothing manufactureris considering using RFID tags to track all the new season's clothing. What cost and benefit factors should be considered? Is there a cost beyond the initial capital investment? . How would cost and benefit considerations differ for those who have already invested in RFID versus those who are only considering it? 3, Consider that the military is moving 1500 tactical vehicles and 1000 containers per month from the Middle East to the United States to recycle, refurbish, or send to the trash pile. What are some of the military cost and benefit factors that are different from commercial or for-profit companies doing similar retrograde activities? 4. Some consumers have already expressed concern about RFID tags being in their children’s clothing, calling the tags an invasion of privacy. What is the ethical and social cost associated with such RFID tags for a retail company? 5. In response to consumer worries, RFID tag manufacturers are developing "kill" technologies to allow consumers to disable RFID tags after goods are purchased. How might this affect consumer attitudes and company costs? After Completing This Chapter. Thestudent should beable + Evaluate project cash flows with the internal rate of return (IRR) measure. * Plot a project's present worth (PW) against the interest rate # Use an incremental rate of return analysis to evaluate competing alternatives. ‘ Develop and use spreadsheets to make IRR and incremental rate of return calcula tions, 221 Cc222 CHAPTER 7: RATE OF RETURN ANALYSIS, Key Words increment of borrowing. internal rate of return NPW plot inerement of investment MARR rate of return incremental rate of return ~~ 5 3 In this chapter we will examine four aspects of rate of retura, the third major dialysis, method. First, the meaning of “rate of retum” is explained; second, calculating the rate of return is illustrated; third, rate of return analysis problems are presented; and fourth, incremental analysis is presented. In an appendix to the chapter, we describe difficulties sometimes encountered when computing an interest rate for cash flow series with multiple sign changes. Rate of return is the most frequently used measure in industry. Problems in comput- ing the rate of return sometimes occur, but its major advantage is that itis a single figure of merit that is readily understood. Consider these statements: ‘The net present worth on a project is $32,000. = The equivalent uniform annual net benefit is $2800. + The project will produce a 23% rate of return ‘While none ofthese statements tells the complete story, the third one messures the project's desirability in terms that are widely and easily understood. Thos, this measure is accepted by engineers and business leaders alike. There is another advantage to rate of retum analysis. In both present worth and annual cash flow calculations, one must select an interest rate—and the exact value may be @ difficult and controversial item. In rate of return analysis. no interest rate is introduced into the calculations (except as described in Appendix 7A). Instead, we compute a rate of relurm (more accurately called iuternal rare of return) froma the cash flow. To decide how to proceed, the calculated rate of retum is compared with a preselected minimum attractive rate of return, or simply MARR. This isthe same value of used for present worth and annual cash flow analysis, INTERNAL RATE OF RETURN Internal rate of return is the interest rate at which the present worth and equivalent uniform annual worth are equal to 0. This definition is easy to remember, and it also tells us how to solve for the rate of return. In earlier chapters we did this when we solved for the interest rate on a loan or investment. Other definitions based on the unpaid balance of a loan or the unrecovered invest- ‘ment can help clarify why this rate of return is also called the internal rate of return or IRR. In Chapter 3 we examined four plans to repay $5000 in 5 years with inter- est at 8% (Table 3-1). In each case the amount loaned ($5000) and the Joan duration G years) were the same. Yet the total interest paid to the lender varied from $1200 to $2347. In each case the lender received 8% interest each year on the amount of money actually owed. And, at the end of 5 years, the principal and interest payments exactly