Engineering Economics, External rate of return; rate of return for multiple roots; positive cash flow taken outside the project; excess cash invested elsewhere; solving for the rate of return; Modified IRR; MIRR.
Good sir, I've subscribed to this channel when I saw the first video, this is one of the best channel, I'll be using it and share videos from this channel.
Good question, but no, the $5000 can only move through time at the unknown interest rate. It may take a while to understand the logic behind this method, but it is correct. FYI, some books refer to ERR as MIRR (Modified IRR). I encourage you to explore some of my other videos on this topic. Hope this helps!
What if you had multiple payments going out instead of just one? Can those payments be collapsed down into one big payment so that the problem is solveable without trial and error? Ex: With a MARR of 25%, You get $1000 at time t=0. You pay $2500 at t=1. You pay $2500 at t=2. You get $6000 at t=3. If you notice, there's no way to solve for i* now because you wind up with: 1000(F/P, 25%, 3) + 6000 = 2500(F/P, i*, 2) + 2500(F/P, i*, 1) 7953.10 = 2500(F/P, i*, 2) + 2500(F/P, i*, 1) (Now I'm stumped.)
Excellent question. As the problem gets more complicated you will almost always need to resort to a numerical method or trial-and-error to solve for i*. Sorry to say! This particular video is a special-case that is 'solvable' for i*. I suggest you play around with MS Excel -Data/What-if-Analysis/Goal Seek... this is a great under-used feature of Excel that you can probably even find other uses for (in other courses!). Keep watching, and keep the good questions coming!!
The 1.5625 comes from a Table or a Formula for the so-called compound-interest-factor for (F/P, 25%, 2). This notation means: "the Future value given a Present value at a compound interest rate of 25% for 2 periods". The formula is (1+i)^N, which in this case is (1.25)^2 = 1.5625. Hope that helps. Please explore my Channel for more videos that explain all of the different compound interest factors.
I will at the term 'MIRR' - Modified IRR to the description for this video! You are correct to point out that this is another term used in finance to mean the same thing as ERR - thank you!
