Date: 27th Jul 20

SLIDE NO. 01

CN-333:
CONSTRUCTION
ECONOMIC ▪ Spring 2020

ANALYSIS ▪ Lecture 21

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 02

Anne Scheiber's Bonanza

▪ When Anne Scheiber died in 1995,age 101,she left an estate
worth more than $20 million.
▪ It all went to Yeshiva University in New York. The university's
officials were grateful.
▪ But who, they asked, was Anne Scheiber?

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 02

Anne Scheiber's Bonanza

▪ She wasn't a mysterious heiress or a business tycoon, it turned
out. She was a retired IRS auditor who had started investing in
1944, putting $5000-her life savings up to that point-into the
stock market.
▪ Scheiber's portfolio was not based on get rich-quick companies. In
fact, it contained mostly "garden variety" stocks like Coca Cola
and Exxon.
▪ Scheiber typically researched stock purchases carefully, and then
held onto her shares for years, rather than trading them. She also
continually reinvested her dividends.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 04

Anne Scheiber's Bonanza

▪ Acquaintances described her as extremely frugal/penny-wise and
reported that she lived as a near loner in her small apartment.
▪ Despite her increasing wealth, Scheiber never indulged in a lavish
lifestyle.
▪ Despite her extensive wealth, she had a reputation for
frugality/penny- pinching and eccentricity/oddness, including one
incident in which she took food from a meeting of shareholders
and consumed it over the next three days. At the end of her life,
she lived in the same apartment and wore the same clothing that
she did in 1944.
CN-333: Construction Economic Analysis- Muhammad Umer
Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 05

Anne Scheiber's Bonanza

▪ What motivated Scheiber to accumulate so much money?
▪ In large part, it seems to have been a reaction to her life
experiences.
▪ Scheiber worked for over 20 years as a tax auditor but failed to
receive promotions. She attributed her lack of professional
advancement to discrimination against her as a woman.
▪ At her request, the endowment she left to Yeshiva University was
used to fund scholarships and interest-free loans for women
students.
CN-333: Construction Economic Analysis- Muhammad Umer
Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 06

The Internal Rate of

Return Method

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 07

The Internal Rate of Return Method

The IRR method is the most widely used rate-of-return method for performing engineering
economic analyses.
It is sometimes called by several other names, such as the investor’s method, the discounted
cash-flow method, and the profitability index.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 08

The Internal Rate of Return Method

This method solves for the interest rate that equates the equivalent worth of an alternative’s
cash inflows (receipts or savings) to the equivalent worth of cash outflows (expenditures,
including investment costs).
Equivalent worth may be computed using any of the three methods discussed earlier.
The resultant interest rate is termed the Internal Rate of Return (IRR).
The IRR is sometimes referred to as the breakeven interest rate.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 09

The Internal Rate of Return Method

Using a PW formulation

Once i’ has been calculated, it is compared with the MARR to assess whether the
alternative in question is acceptable.
If i’ > MARR, the alternative is acceptable; otherwise, it is not.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 10

The Internal Rate of Return Method

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 11

The Internal Rate of Return Method

A popular variation of Equation for computing the IRR for an alternative is to determine the i’
at which its net PW is zero.
i’ is often used in place of i to mean the interest rate that is to be determined.
In equation form, the IRR is the value of i’ at which

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 12

Economic Desirability of a Project Using

the IRR Method
AMT, Inc., is considering the purchase of a digital camera for the maintenance of design
specifications by feeding digital pictures directly into an engineering workstation where
computer-aided design files can be superimposed over the digital pictures.
Differences between the two images can be noted, and corrections, as appropriate, can then
be made by design engineers.
The capital investment requirement is $345,000 and the estimated market value of the
system after a six-year study period is $115,000.
Annual revenues attributable to the new camera system will be $120,000, whereas additional
annual expenses will be $22,000.
You have been asked by management to determine the IRR of this project and to make a
recommendation. The corporation’s MARR is 20% per year.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 13

Solution by Linear Interpolation

In this example, we can easily see that the sum of positive cash flows ($835,000) exceeds the
sum of negative cash flows($455,000).
Thus, it is likely that a positive valued IRR can be determined.
By writing an equation for the PW of the project’s total net cash flow and setting it equal to
zero, we can compute the IRR:

PW = 0 =-$345,000 + ($120,000 - $22,000)(P/A, i’ %, 6) + $115,000(P/F, i’ '%, 6)

I’% = ?

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 14

To use linear interpolation, we first need to try a few values for i’.
A good starting point is to use the MARR.
At i’ = 20%:
PW =-$345,000 + $98,000(3.3255) + $115,000(0.3349)
=+$19,413
Since the PW is positive at 20%, we know that i’ > 20%.
At i’ = 25%:
PW =-$345,000 + $98,000(2.9514) + $115,000(0.2621)
=-$25,621

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 15

Now that we have both a positive and a negative PW, the answer is bracketed
(20% < i’ % < 25%).
The dashed curve in Figure is what we are linearly approximating.
The answer, i’ %, can be determined by using the similar triangles represented by dashed lines
in Figure.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 16

line BA/ line BC = line dA/ line de

Here, BA is the line segment B - A = 25% - 20%. Thus,

i’ = 22.16% (approx.)
Because the IRR of the project (22.16%) is greater than the MARR, the project is
acceptable.

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi
 Date: 27th Jul 20
SLIDE NO. 17

What Is Incremental
Analysis?

CN-333: Construction Economic Analysis- Muhammad Umer

Copyrights Protected – Department of Civil Engineering, NED University of Engineering & Technology, Karachi